ECO 501.

1; 501:2
MANAGERIAL ECONOMICS

Summer Semester, 2021

BRAC University
Week 8: Monopolistic Competition
 Week 8: Monopolistic Competition
• PART I: Revisiting Previous • Blank Slide
Week. Introduction to Markets
and Revisiting Perfect
Competition
• PART II: Introducing
Monopolistic Competition. What
are the assumptions? How is this
market characterized?
 Introduction to Markets
• REF: McGuigan: File Shared • 3. Characteristics:
• Preview of Previous Class ● Relevant Market,
Concentrated Market,
• 1. Commodity Markets vs Fragmented Market,
Matching Markets Consolidated Market
• 2. Markets defined by sellers: • 4. Threats:
●Perfect Competition ●Substitutes, Complements,
●Monopoly, Duopoly, Oligopoly, Entry, Exit
Monopolistic Competition
• 5. Power of buyers, Rivalry
 Perfect Competition Revisited
• PERFECT (PURE) COMPETITION: • IMPLICATION OF PERFECT
• Assumptions (PURE) COMPETITION
1. Many buyers and many sellers • 1. A commodity market
2. Homogenous, identical 2. Each unit identical to all
product in the eyes of the buyers & sellers
consumer 3. each unit sells at same price.
3. Independent decisions 4. No buyers or no sellers can
4. Symmetric information influence market price or quality
5. Easy entrance and exit 5. Market forces (dd and ss)
determine outcome
 Introduction to Markets
• TOPIC 1: • Matching Markets: Buyers & sellers
How is a market defined? meet certain conditions.
• Where buyers & sellers meet to • Examples: Think
transact a good/ service. • We first start with commodity
• Commodity Markets: buyers & markets. Then move on to
sellers meet to transact a matching markets.
standardized good. • Markets defined by sellers– not by
• Buyers & Sellers do not need to buyers.
know each other, i.e., do not need Monopoly; Duopoly; Oligopoly etc
to match
• Examples: Think
 Introduction to Markets
TOPIC 2: • Concentrated Market:
What determines power of firms? A relevant market with majority
Relevant Market: of total sales occurring in the
Group of firms belonging to the largest four firms.
same strategic group of • Example: There are many
Consumers. groceries in Dhanmondi, but the
Example: The grocery in your relevant market is dominated by
neighbourhood has market power few large superstores.
in the neighbourhood. Think due to what factors?
Think due to what factors?
 Introduction to Markets
• Fragmented Market: • Consolidated Market:
A relevant market whose market A relevant market whose
shares are small. number of firms has declined
• Example: Groceries in over time through acquisition,
Dhanmondi. Fragmented into merger, and buy outs.
few large groceries, and many • Example: Telecom carriers;
small corner shops. Cigarette and tobacco.
Think due to what factors? Think due to what factors?
 Introduction to Markets
• Threat of Substitutes and • Threat of Entry:
Complements: How difficult or easy is it to
How difficult or easy are restrict entrance into a relevant
substitutes (or complements) market?
available in a relevant market? • Example: Not any firm can
• Example: The lightning cable of supply at Karwan Bazar?
iPhones. Think why group of firms resort
Think why firms resort to this to this strategy?
strategy? OR Why they avoid?
 Introduction to Markets
• The Power of Buyers: • Intensity of Rival Tactics:
Dhaka WASA is a monopoly in its There are two firms, X and Y.
relevant market, Dhaka City, but Whatever tactics X employs, it
not in the markets of its inputs. has to think about the response
Suppliers to Dhaka WASA can of what Y will do; and vice versa.
hold the organization at hostage. Also known as inter-dependent
• Think why this happens with decision-making.
other firms in other markets. • Example: Grameenphone vs
Robi.
 Introduction to Markets
• Barriers of Exit: • Myth of Market Share:
Entering a market that is highly 1. High market share does not
restricted is difficult. Exiting necessarily imply power in a
from the market after entrance market.
is equally difficult. 2. Four firms, each have 25%
• This is based on sunk costs. market share– competitive.
3. Market share is a static
concept. Over time, market
shares can change.
 Monopolistic Competition
• Monopolistic Competition: First • Like perfect competition.
coined by Edward Chamberlin Distinction in the existence of
and Joan Robinson differentiated products.
independently in 1933. • Market segmented into two
• This market has elements of parts. Part I: market like perfect
both monopoly in one segment- competition. Part II: market that
and elements of competition in has elements of monopoly and
another segment. Thus the rival tactics.
naming monopolistic
competition
 Monopolistic Competition
• Assumptions. • 3. Rivalry in dominant segment.
1. A few dominant firms in one Decisions are inter-dependent:
segment, and a large number of X’s decision influences Y’s and
small firms in another segment. vice versa.
2. Dominant firms sell products 4. Pure competition in fringe
that are differentiated in some segment. Decisions are
manner– real or perceived. independent: X’s decision does
Real differentiation? not influence Y’s and vice versa.
Perceived differentiation?
 Monopolistic Competition
• Product Differentiation? • 2. Differentiated Product: similar,
• 1. Homogenous products: but not identical in eyes of
identical in eyes of consumers. consumers. EG: two sarees,
EG: a bottle of coca-cola or different designs. A buyer may
pepsi. If info is symmetric about be willing to offer higher price
quality, then price is same, for the saree he/she likes more.
consumers see them as If seller can identify which colour
identical. Why would they want or type sells more, they can
to offer higher price for same price those at higher price and
product? not lose their sales.
 Monopolistic Competition
• 3. Perceived Differentiation: • 4. Real Differentiation: When
When differentiation is two products are similar, but
‘cosmetic’. The products are there is ‘real’ differentiation in
identical except for some minor quality. EG: Android vs iOS. Both
aspect that does not lead to do the same job, but one is
change in quality of two perceived to be better than the
products. EG: the saree example other by consumers. Thus
earlier. Since there is scope for similar products can sell at
differentiation, sellers can different prices. THINK of more
charge different prices. THINK of examples.
more examples.
 Monopolistic Competition
• 5. Two Segments: In the • 5A. Market Power in Dominant
Dominant Segment, one would Segment: The dominant
expect real product segment has elements of
differentiation. EG: the mobile monopoly. This segment is a
phone example earlier. In the concentrated market dominated
Fringe Segment, one would by few firms. EG: Fashion
expect perceived or cosmetic industry has many firms in the
differentiation. Why does this Fringe, but few Dominant Firms
occur? in the upper segment.
 Monopolistic Competition
• 5B: What leads to Market Power • B. Threat of Entry: Dominant
in the Dominant Segment? firms know others can’t enter
A. Brand loyalty. Consumers get their segment easily, but are
used to products by certain aware of responses by rival
firms. EG: Apple will always have firms. THINK how rivals influence
some loyal customers just like strategies?
Samsung has for its flagship C. Relevant Market: Tangail
phones. Consmers also become Sarees have a local monopoly in
familiar with Apple/ Samsung Tangail. Not so in Dhaka. THINK
more. THINK of other examples.
 Monopolistic Competition
• A Monopolistic Competition • 3. Computers: Dominant and
Market. Fringe Firms across Dhaka, and
1. Fashion industry. Shirts or also Dominant and Fringe Firms
Sarees. Dominant Firms in one in say IDB or MultiPlan.
end. Fringe Firms in the other. 4. THINK about more.
2. Fish Market: Dominant Firms ● Dominant and Fringe Firms
in Superstores. Fringe and also across a geographical location
Dominant Firms in say ● Dominant and Fringe Firms
KarwanBazar within a geographical location
● How can customers be
separated or attracted?
 Monopolistic Competition
• Strategies for Dominant Firms: • Strategies for Fringe Firms:
1. THINK how dominant firms 1. THINK how fringe firms can
can sell their product. sell their product.
2. THINK how concepts learned 2. THINK how concepts learned
earlier can help you like, EG: earlier can help you like, EG:
elasticity of demand; diminishing elasticity of demand; diminishing
returns etc. Add to this: relevant returns etc. Add to this: relevant
markets; threats of entry & exit; markets; threats of entry & exit;
and others. and others.
 Monopolistic Competition
• Assignment Topic • Assignment shall be given after
• 1. What is monopolistic Tue Class: Aug 10.
competition?
• 2. What factors give firms •  Good Luck 
market power in these markets?
• 3. Identify a set of such factors.
Think about a market in the real
world.