5 Differentiated Competition and Competition Policy Free Online FlashCards

When are products differentiated?

Products are differentiated when buyers view them as imperfect substitutes.

What can differentiate products besides physical features?

Differences may involve physical features, location, service, reliability, brand reputation, or consumer perceptions.

How can differentiation affect a firm's pricing power?

Differentiation gives a firm some pricing power: a price increase may cause some customers to switch, but not necessarily all.

How do close substitutes affect pricing power?

The closer the substitutes, the more responsive customers are to price changes and the less pricing power the firm has.

What defines monopolistic competition?

It has many firms, differentiated products, and relatively accessible entry and exit.

How does a monopolistically competitive firm choose short-run output and price?

The firm chooses output where $MR = MC$, then charges the highest price consumers will pay for that output, as shown by its demand curve.

How does price relative to average total cost determine profit or loss?

The firm earns economic profit if its price exceeds average total cost and incurs a loss if its price is below average total cost.

How do entry and exit respond to profits and persistent losses?

Profits tend to attract entry, which draws customers away and shifts existing firms' demand inward. Persistent losses encourage exit, tending to shift remaining firms' demand outward.

What happens to economic profit in the standard long-run model?

In the standard long-run model, entry and exit reduce economic profit to zero.

What does zero economic profit mean?

Zero economic profit means revenue covers explicit costs and the opportunity cost of the resources used; it does not mean zero accounting profit.

Which efficiency conditions are absent in the standard long-run model?

In long-run equilibrium, price is generally above marginal cost, and the firm does not produce at minimum average total cost. The model therefore predicts neither allocative nor productive efficiency.

What is the trade-off involved in product differentiation?

Differentiation can expand consumer choice and encourage improvements, but creating and marketing distinctions uses resources. Whether variety's benefits outweigh those costs depends on the circumstances.