👨‍🏫 Notes on Lecture 8a

Pindyck and Rubinfeld: Section 12.1
 Sections 12.4 – 12.5

See also: 🔎 Market Structure Comparison
See also: 👨‍🏫 L8b Game Theory

Monopolistic Competition

How to solve a Monopolistic Competition Problem:

1. In the short run, Monopolistic Competition is JUST LIKE Monopoly. There is nothing new to learn.
2. In the long run, you have free entry, like in Perfect Competition

Why are profits always zero ($\pi = 0$) in the long run?
$\pi > 0$ → Entry occurs → Number of firms ↑
 → Demand for product of incumbent firms ↓
 → Demand curve of incumbent firms shifts left
 → $q^{MC}$ goes down to point where $P = AC$
 → Economic profits are 0

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$\pi < 0$ → Exit occurs → Number of firms ↓
 → Demand for product of remaining firms ↑
 → Demand curve of incumbent firms shifts right
 → $q^{MC}$ goes up to point where $P = AC$
 → Economic profits are 0

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Oligopoly

In oligopoly there are barriers to entry, so there are few firms and high concentration ratios. With few firms, Strategic Interdependence is important, so we use Game Theory for Oligopoly.