Monopolistic Competition 독점적 경쟁

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1 Monopolistic Competition 독점적 경쟁
16 Monopolistic Competition 독점적 경쟁 Economics P R I N C I P L E S O F N. Gregory Mankiw Examples of monopolistic competition are everywhere: the clothes students wear, the frappaccinos they slurp up on their way to class, the magazines they read, the nightclubs where they dance. As a result, students find the theory of monopolistic competition more relevant than the theory of perfect competition, which best describes products like wheat and soybeans, products that few students ever consider buying. The last part of the chapter, on advertising and brand names, is especially interesting & useful for business students. If students are reasonably comfortable with the material on perfect competition and monopoly, then this chapter should not be difficult. It is also shorter than average. Premium PowerPoint Slides by Ron Cronovich

2 In this chapter, look for the answers to these questions:
What market structures lie between perfect competition and monopoly, and what are their characteristics? 완전경쟁과 독점 사이에는 어떤 시장구조가 있으며 그 특징은 무엇인가? How do monopolistically competitive firms choose price and quantity? Do they earn economic profit? 독점적 경쟁 기업들은 어떻게 가격과 수량을 결정하는가? 그들은 경제적 이윤을 얻는가? In what ways does monopolistic competition affect society’s welfare? 독점적 경쟁 기업들은 사회후생에 어떻게 영향을 주는가? What are the social costs and benefits of advertising? 광고의 사회적 비용과 편익은 무엇인가? 1

3 Introduction: Between Monopoly and Competition
Two extremes 양 극단 Perfect competition: many firms, identical products Monopoly: one firm In between these extremes: imperfect competition 양 극단의 사이가 불완전경쟁 Oligopoly: only a few sellers offer similar or identical products. 소수의 기업들이 유사하거나 동일한 제품을 판매 Monopolistic competition: many firms sell similar but not identical products. 수많은 기업들이 유사하지만 동일하지 않은 제품을 판매 In the preceding two chapters, we studied the two extremes of the competition spectrum. This chapter focuses on monopolistic competition, one of the market structures in between the two extremes. Examples of each market type: Perfect competition: wheat, milk Monopoly: tap water, cable TV Oligopoly: tennis balls, cigarettes Monopolistic competition: novels, movies MONOPOLISTIC COMPETITION 2

4 Characteristics & Examples of Monopolistic Competition
Characteristics: 특징 Many sellers 다수의 판매자 Product differentiation 제품 차별화 Free entry and exit 자유로운 진입과 퇴출 Examples: apartments books bottled water clothing fast food night clubs Another important dimension of product differentiation, not emphasized in the book, is location. Gasoline seems like an undifferentiated product, yet different gas stations charge different prices. How can some gas stations get away with charging 5 or even 10 cents more per gallon? The answer is product differentiation by location. Imagine you’re driving home in rush-hour traffic from a grueling 10-hour day at the office. The orange warning light comes on, indicating your car needs gas. After uttering a few choice expletives, you notice two gas stations at an upcoming intersection. The one on the right charges 5 cents more than the one on the left, but is easily accessible. The one on the left would require you to make a left-hand turn in heavy traffic to get into the station, and another to get out. And how much would you save? If you buy 20 gallons, you’d save only $1. Alternatively, imagine you run a gas station located in a highly residential area, in which there are few other businesses – including gas stations. If people want gas, they can buy it from you, or they can drive 10 minutes to a more commercial area with lots of gas stations. Your location allows you to charge a higher price. Business people have long understood that location is a critical dimension of product differentiation. Hence the saying “location, location, location.” MONOPOLISTIC COMPETITION 3

5 Comparing Perfect & Monop. Competition
Perfect competition Monopolistic competition many number of sellers yes free entry/exit zero long-run econ. profits differentiated identical the products firms sell That long-run profits are zero follows from free entry/exit. The market power of a monopolistic competitor follows from the fact that it sells a product that is at least somewhat different from products sold by other firms. The D curve facing a monopolistically competitive firm is downward-sloping because the firm has a bit of market power and sells a unique variety. yes none, price-taker firm has market power? downward-sloping horizontal D curve facing firm MONOPOLISTIC COMPETITION 4

6 Comparing Monopoly & Monop. Competition
Monopoly Monopolistic competition many one number of sellers yes no free entry/exit zero positive long-run econ. profits yes firm has market power? For monopolistic competition, free entry/exit drives profits to zero in the long run. In contrast, barriers to entry prevent the monopolist’s profits from being driven to zero. A monopoly is the sole seller of a product with no close substitutes. In contrast, the monopolistic competitor sells a product with many close substitutes. As a result, demand for the monopolist’s product is less elastic than demand for the monopolistic competitor’s product. downward-sloping downward-sloping (market demand) D curve facing firm many none close substitutes MONOPOLISTIC COMPETITION 5

7 A Monopolistically Competitive Firm Earning Profits in the Short Run
The firm faces a downward-sloping D curve. 수요곡선은 우하향 At each Q, MR < P. To maximize profit, firm produces Q where MR = MC. 이윤극대화 조건 The firm uses the D curve to set P. 수요곡선을 이용, 가격 결정 MC ATC Quantity Price profit D P MR ATC The graphical analysis of the monopolistically competitive firm’s output, price, and profits/losses is very similar to that of the monopoly firm. One subtle difference is that the demand curve (and MR curve) facing the monopolistically competitive firm is likely to be flatter than the demand curve facing the monopolist, as the monopolistic competitor faces competition from other firms selling similar products. Q MONOPOLISTIC COMPETITION 6

8 A Monopolistically Competitive Firm With Losses in the Short Run
For this firm, P < ATC at the output where MR = MC. 한계수입과 한계비용이 같을 때 가격보다 평균비용이 높다 The best this firm can do is to minimize its losses. 기업이 할 수 있는 최선은 손실을 최소화하는 것 MC ATC Quantity Price losses ATC D P MR Q MONOPOLISTIC COMPETITION 7

9 Monopolistic Competition and Monopoly
Short run: Under monopolistic competition, firm behavior is very similar to monopoly. 독점적 경쟁 하에서 단기적으로 기업의 행동은 독점과 매우 유사 Long run: In monopolistic competition, entry and exit drive economic profit to zero. 진입과 퇴출로 인해 장기적으로 이윤은 0 If profits in the short run: 단기적으로 이윤이 나면 New firms enter market, 신규기업이 시장에 진입하고 taking some demand away from existing firms, prices and profits fall. 기존기업의 수요를 빼앗아 가격과 이윤 하락 If losses in the short run: 단기적으로 손실이 나면 Some firms exit the market, 일부 기업이 시장을 떠나고 remaining firms enjoy higher demand and prices 남은 기업들의 수요와 가격은 상승 MONOPOLISTIC COMPETITION 8

10 A Monopolistic Competitor in the Long Run
Entry and exit occurs until P = ATC and profit = zero. 진입과 퇴출은 이윤이 0이 될 때까지 발생 Notice that the firm charges a markup of price over marginal cost and does not produce at minimum ATC. 가격은 한계비용 보다 높게 받고, 생산량은 평균총비용의 최저가 아님 MC ATC Quantity Price P = ATC markup The level of output that minimizes ATC is greater than the output that maximizes the monopolistic competitor’s profits. Hence, we say the monopolistic competitor operates with excess capacity. (More on this topic on the next slide.) D MC MR Q MONOPOLISTIC COMPETITION 9

11 Why Monopolistic Competition Is Less Efficient than Perfect Competition 1. Excess capacity 초과설비 The monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output. 독점적 경쟁 기업은 최저 (평균총)비용 생산량보다 적게 생산 Under perfect competition, firms produce the quantity that minimizes ATC. 완전경쟁에서는 평균총비용 최저에서 생산 2. Markup over marginal cost 한계비용 이상으로 가격 올리기 Under monopolistic competition, P > MC. Under perfect competition, P = MC. Due to the markup of price over marginal cost, the market output under monopolistic competition will be smaller than the socially efficient output, as we discuss on the following slide. MONOPOLISTIC COMPETITION 10

12 Monopolistic Competition and Welfare
Monopolistically competitive markets do not have all the desirable welfare properties of perfectly competitive markets. 독점적 경쟁 시장이 완전경쟁 시장의 바람직한 특성을 모두 가지는 것은 아니다. Because P > MC, the market quantity is below the socially efficient quantity. 가격이 한계비용보다 크므로 시장 거래량은 사회적으로 바람직한 수준보다 적다. Yet, not easy for policymakers to fix this problem: Firms earn zero profits, so cannot require them to reduce prices. 그러나 정책당국이 이 문제를 해결하는 것은 쉽지 않으니, 기업들의 이윤이 0이므로 가격을 내리도록 요구할 수가 없기 때문이다. The problem facing policymakers here is similar to the problem arising from natural monopoly: With natural monopoly, ATC is always falling, so MC is below ATC. If regulators force a natural monopoly to price at marginal cost, it will incur losses. MONOPOLISTIC COMPETITION 11

13 Monopolistic Competition and Welfare
Number of firms in the market may not be optimal, due to external effects from the entry of new firms: 신규진입에 따른 외부효과로 인해 시장에 존재하는 기업의 수는 최적이 아닐 수 있다. The product-variety externality: 제품 다양화 (외부)효과 surplus consumers get from the introduction of new products The business-stealing externality: 시장탈취 (외부)효과 losses incurred by existing firms when new firms enter market The inefficiencies of monopolistic competition are subtle and hard to measure. No easy way for policymakers to improve the market outcome. 독점적 경쟁의 비효율성은 미묘하고 측정하기도 어려워서, 정책당국이 시장성과를 개선하는 것은 쉽지가 않다. One of these externalities is positive, the other is negative. It’s not clear which one is bigger, and it may in fact differ by industry. MONOPOLISTIC COMPETITION 12

14 A C T I V E L E A R N I N G 1 Advertising
1. So far, we have studied three market structures: perfect competition, monopoly, and monopolistic competition. In each of these, would you expect to see firms spending money to advertise their products? Why or why not? 2. Is advertising good or bad from society’s viewpoint? Try to think of at least one “pro” and “con.” Consider breaking up your lecture with a 10 minute discussion. First, give your students a few quiet moments to formulate their responses. Then, ask for volunteers to share their answers. If you have a chalkboard or dry-erase board, concisely paraphrase each student’s response as it is volunteered. If a student volunteers a “wrong” answer, write it down anyway. After the class has generated a list, have the class go over each item on the list to make sure it really belongs on the list. Benefits: 1) Breaks up the lecture into chunks. 2) Engages students. 3) Gets students to think about the implications of the market structures they’ve studied so far. (Hopefully, some will recognize that product differentiation is a critical determinant of firms’ motivation to spend on advertising.) 4) Makes students feel invested in learning the second half of the chapter. 13

15 Advertising In monopolistically competitive industries, product differentiation and markup pricing lead naturally to the use of advertising. 독점적 경쟁 산업에서는 제품차별화와 가격 올리기로 인해 자연스럽게 광고를 하게 된다. In general, the more differentiated the products, the more advertising firms buy. 일반적으로, 제품이 차별화될수록 기업들은 더 많은 광고를 한다. Economists disagree about the social value of advertising. 경제학자들은 광고의 사회적 가치에 대해 의견이 일치하지 않는다. This section of the textbook has a nice FYI box contrasting the views on advertising of John Kenneth Galbraith and Frederic Hayek, two of the great economists of the 20th century. MONOPOLISTIC COMPETITION 14

16 The Critique of Advertising
Critics of advertising believe: 광고에 대한 비판론 Society is wasting the resources it devotes to advertising. 사회는 광고에 쏟는 자원을 낭비하고 있다. Firms advertise to manipulate people’s tastes. 기업들이 사람들의 취향을 조작하기 위해 광고를 한다. Advertising impedes competition – 광고는 경쟁을 억제한다. it creates the perception that products are more differentiated than they really are, allowing higher markups. 광고는 제품이 실제보다 더 차별화되어 있다는 인식을 심어 더 높은 가격 올리기가 가능하게 한다. MONOPOLISTIC COMPETITION 15

17 The Defense of Advertising
Defenders of advertising believe: 광고에 대한 옹호론 It provides useful information to buyers. 구매자들에게 유용한 정보를 제공한다. Informed buyers can more easily find and exploit price differences. 정보를 가진 구매자들은 가격격차를 더 쉽게 발견하고 이용할 수 있다. Thus, advertising promotes competition and reduces market power. 그러므로 광고는 경쟁을 촉진하고 시장지배력을 떨어뜨린다. Results of a prominent study: Eyeglasses were more expensive in states that prohibited advertising by eyeglass makers than in states that did not restrict such advertising. The study mentioned here was by economist Lee Benham, published in the Journal of Law and Economics in The textbook has a case study that discusses this research in more detail. MONOPOLISTIC COMPETITION 16

18 Advertising as a Signal of Quality
A firm’s willingness to spend huge amounts on advertising may signal the quality of its product to consumers, regardless of the content of ads. Ads may convince buyers to try a product once, but the product must be of high quality for people to become repeat buyers. The most expensive ads are not worthwhile unless they lead to repeat buyers. When consumers see expensive ads, they think the product must be good if the company is willing to spend so much on advertising. MONOPOLISTIC COMPETITION 17

19 Brand Names In many markets, brand name products coexist with generic ones. 많은 시장에서 브랜드 (이름) 제품과 일반 제품이 공존한다. Firms with brand names usually spend more on advertising, charge higher prices for the products. 브랜드를 가진 기업은 대체로 광고비를 더 많이 지출하고 제품 가격도 높다. As with advertising, there is disagreement about the economics of brand names… 광고처럼 브랜드의 경제학에 대해서도 의견이 일치하지 않는다. MONOPOLISTIC COMPETITION 18

20 The Critique of Brand Names
Critics of brand names believe: 브랜드 이름에 대한 비판론 Brand names cause consumers to perceive differences that do not really exist. 브랜드는 소비자들로 하여금 실제로 존재하지 않는 차이를 느끼게 한다. Consumers’ willingness to pay more for brand names is irrational, fostered by advertising. 브랜드에 대한 소비자들의 더 높은 지불용의는 비합리적이며, 광고가 이를 촉진한다. Eliminating govt protection of trademarks would reduce influence of brand names, result in lower prices. 상표에 대한 정부 보호를 제거하면 브랜드의 영향을 감소시켜 가격 하락을 초래할 것이다. MONOPOLISTIC COMPETITION 19

21 The Defense of Brand Names
Defenders of brand names believe: 브랜드에 대한 옹호론 Brand names provide information about quality to consumers. 브랜드 이름은 소비자들에게 품질에 대한 정보를 제공한다. Companies with brand names have incentive to maintain quality, to protect the reputation of their brand names. 브랜드를 가진 기업들은 자사 브랜드의 평판을 지키기 위해 품질을 유지하려는 경제적 유인을 가진다. MONOPOLISTIC COMPETITION 20

22 CONCLUSION Differentiated products are everywhere; examples of monopolistic competition abound. 차별화된 제품은 도처에 있어서 독점적 경쟁의 사례를 우리 주변에서 찾을 수 있다. The theory of monopolistic competition describes many markets in the economy, yet offers little guidance to policymakers looking to improve the market’s allocation of resources. 독점적 경쟁 이론은 경제 내의 많은 시장을 설명하지만 시장의 자원배분을 개선하려는 정책당국에게 별다른 지침을 주지는 못한다. MONOPOLISTIC COMPETITION 21

23 CHAPTER SUMMARY A monopolistically competitive market has many firms, differentiated products, and free entry. Each firm in a monopolistically competitive market has excess capacity – produces less than the quantity that minimizes ATC. Each firm charges a price above marginal cost. 22

24 CHAPTER SUMMARY Monopolistic competition does not have all of the desirable welfare properties of perfect competition. There is a deadweight loss caused by the markup of price over marginal cost. Also, the number of firms (and thus varieties) can be too large or too small. There is no clear way for policymakers to improve the market outcome. 23

25 CHAPTER SUMMARY Product differentiation and markup pricing lead to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to reduce competition and take advantage of consumer irrationality. Defenders argue that firms use them to inform consumers and to compete more vigorously on price and product quality. 24