Deck 15: Monopolistic Competition

Question 1

What is meant by product differentiation?

Answer 1

Product differentiation is a strategy that firms use to achieve market power. It involves producing products that have distinct positive identities in consumers' minds.

Question 2

Name the four types of market structure in order from most competitive to least competitive.

Answer 2

Perfect competition, monopolistic competition, oligopoly, and monopoly

Question 3

What is a commitment device?

Answer 3

A commitment device represent actions that individuals take in one period to try to control their behavior in a future period.

Question 4

According to its advocates, what are four advantages product differentiation and advertising provide to consumers?

Question 5

Many people have observed that retail gas stations tend to operate very closely to one another. Explain the logic behind having a gas station at each corner of an intersection.

Question 6

Firms owning brand names like Coca-Cola that are so well known continue spending hundreds of millions of dollars on advertising. Since this doesn't seem to be an effort to increase consumer awareness what is the possible explanation for this behavior?

Question 7

How do competitive firms try to achieve market power? What is one way they try to accomplish this?

Question 8

What arguments can be made in favor of product differentiation and advertising?

Question 9

Define horizontal differentiation.

Question 10

What is the conclusion that behavioral economists have made about the amount of product variety in the market place?

Question 11

Critics of advertising argue that advertising by its very nature imposes a cost on society. Explain what these costs are.

Question 12

Using Table 15.1 above fill in the third and fourth column by stating whether price is a decision variable or not and the conditions of entry.

Question 13

Using Table 15.1 above fill in the first two columns by identifying the number of firms and the types of products produced by each industry structure.

Question 14

Using Table 15.1 above fill in the fifth and sixth column by stating what distinguishes each industry from the other and by providing examples of each.

Question 15

What arguments can be made against product differentiation and advertising?

Question 16

List the characteristics of a monopolistically competitive market.

Question 17

Explain the strategy of product differentiation?

Question 18

Describe three features of monopolistic competition that differentiate it from monopoly.

Question 19

What is behavioral economics?

Question 20

Cigarette advertising on our nation's radio and television stations has been prohibited for more than the past three decades by federal law. What is curious about this law is that it came into being not just because of the lobbying efforts of American Medical Association but also by the tobacco industry. Use economic logic to explain this apparent paradox.

Question 21

Comment on the following statement. "Monopolistically competitive firms will still produce in the short run even if the demand curve is below their average variable cost curve because the firms still maintain a degree of market power."

Question 22

Explain the characteristics of monopolistic competition. Explain how price and output are determined in monopolistic competition. Illustrate your answer with a graph.

Question 23

Comment on the following statement: "The demand facing a firm in perfect competition is less elastic than the demand facing a firm in monopolistic competition."

Question 24

Explain why demand for a monopolistically competitive firm's product is more elastic than the demand curve that a monopolist faces.

Question 25

Explain what should happen to the demand curve of monopolistically competitive firms as consumers increasingly perceive their products to be more like commodities. What industrial structure does this lead to?

Question 26

Draw a graph showing the demand curve faced by a perfectly competitive firm. On the same graph, draw the demand curve faced by a monopolistically competitive firm.

Question 27

Compare perfect competition and monopolistic competition. In what ways are they similar? In what ways are they different?

Question 28

Using Figure 15.1, identify which demand curve would belong to that of a purely competitive firm and which would belong to a monopolistically competitive firm and explain your reasoning.

Question 29

It is often argued that gas stations operate inefficiently because they have "excess capacity" in the form of more pumping stations than they would otherwise need if they were operating under conditions of perfect competition. However, can you think of any reason why a gas station franchise owner would wish to install more pumps than he knows will rarely if ever be fully utilized at any one time? Can you explain the economic logic of this "apparent" wastefulness?

Question 30

If you travel to Mexico you will often see currency exchange businesses along the way as you approach the border. Even though each of these businesses is essentially "selling" the same product (i.e. Mexican pesos) how is it that some of them are able to charge more for the peso than others?

Question 31

Comment on the following statement and evaluate it. "Differentiating a product separates you from your competitors so the market will see you as delivering unique benefits. But you don't want to be too different."