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Price descrimination and monopolistic competition

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Monopolistic competition: History: Developed by the American economist Edward Chamberlin (1899-1967). Explanation: A monopolistic competitive market is open with many competing firms where each firm has a little bit of market power -> firms have some ability to set their own prices since products differ slightly from each other. Characteristics of a monopolistic competition: -The industry is made up of a fairly large number of firms. -Consists of small firms, where each one has a small share of the market. -Each firm's product can be told apart from the other firms product by the customers: e.g.: Different brand name, colour, package, design, service, (main difference from a Perfect competition). -examples: Mechanics, plumbers, jewellers, hair dressers, restaurants... ...read more.


That is why firms that accumulate in one area often try to distinguish themselves from one another through different offers, such as "open 24/7" All firms, no matter what the result of the short run period was, will end up in the position of normal profits in the long run period. This means that each firm is covering exactly it's costs. (see figure 10.4). This is another point where a monopolistic competition differs from a perfect competition. Price Discrimination 1) It is a pricing policy that firms adopt to further increase then profits 2) It exists when a firm sells the same product at two or more different prices in two or more markets provided that price difference DO NOT reflects products or provision costs differences Type of price discrimination 1. ...read more.


It does not, however mean that everyone is equal 3. If a market is at PARETO optimality, it is said to be socially efficient. Social efficiency exists when community surplus in maximized. 4. Market Failure occurs when community surplus is not maximized 5. When markets fail, governments are often expected to intervene in order to eliminate market failure and move towards the optimal allocation of resources Types of Market Failure: 1. Imperfect Competition a. Monopoly b. Monopolistic Competition c. Oligopoly 2. Lack of public goods (parks, lightening...) 3. Undersupply of merit goods (education, health services...) 4. Oversupply of demerit goods ("sin" product: drugs, cigarettes...) 5. Existence of externalities externality (pollution) +: of production Of consummation -: of production (pollution) Of consummation (smoking cigarette) 6. Immobility of factors of production 7. Problems of information 8. Creation of inequality 9. Short-termism ...read more.

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