Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAPTER 10
Price and Output
Under Monopolistic
Competition and
Oligopoly
10.1 MONOPOLISTIC COMPETITION DEFINED
Monopolistic competition refers to the market organization in which there are many firms selling closely
related but not identical commodities. An example is given by the many cigarette brands available (e.g., Marlboro,
Winston, Kent). Another example is given by the many different detergents on the market (e.g., All,
Cheer, Tide). Because of this product differentiation, sellers have some degree of control over the prices
they charge and thus face a negatively sloped demand curve. However, the existence of many close substitutes
severely limits the sellers “monopoly” power and results in a highly elastic demand curve.
10.2 SHORT-RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION
Since a firm in a monopolistically competitive industry faces a highly elastic but negatively sloped demand
curve for the differentiated product it sells, its MR curve will lie below its demand curve. The short-run equilibrium
level of output for the firm is given by the point where its SMC curve intersects its MR curve from below
(provided that at this output level P 5 AVC).
EXAMPLE 1. In Fig. 10-1, d is the highly price-elastic demand curve faced by a typical monopolistic competitor and MR
is the corresponding MR curve. The best level of output of the firm in the short run is 6 units and is given by point E, at which
MR ¼ SMC. At Q ¼ 6, P ¼ $9 (point A on the demand curve) and SAC ¼ $7 (point B), so that the monopolistic competitor
maximizes profits at AB ¼ $2 per unit and ABCF ¼ $12 in total. The monopolistic competitor would break even if
P ¼ SAC and would minimize losses if P , SAC, as long as P 5 AVC at the best level of output (see Problem l0.3).
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