Okay, let's go ahead and finish up
chapter 13.  let's call this thirteen, part
two.... And in part one we talked about
monopolistic competition as a market
structure and how small firms through
differentiation could produce a little
monopoly power or price making power, but
they were still in a competitive
environment....
so this oxymoron actually kind of makes
some sense.  What happens when those firms
compete against each other is going to
be the subject of this second part for
chapter thirteen, and we're going to
highlight the long-run equilibrium
outcomes and how there's going to be a
breakdown of the efficiency when we have
a monopolistically competitive market
structure.  Okay, so once we understand
that it's a competitive environment it's
very close to saying that entry is still
easy.  Competition comes from lots of
firms all trying to provide product to
the same people.  Entry being easy, more or
less, means that barriers to entry are
minimal.  You want to open up your own
lawn care service-- probably need a truck,
a trailer, a couple mowers, and you know
some some weed eaters,  if you want to
open up a nail salon it's going to be
relatively easy to do that as well,
restaurants are within reach---okay?
There's a lot of mom-and-pop sort of
industries that have relatively low
barriers and you can jump in.  Food trucks
are another good example.  So profitable
firms in any of those areas are actually
going to attract new entrants.  If I see
that the guy who's running a food truck
is driving around a Ferrari, it's not going to
be very long before I start wondering
how much money I can make if I open up
my own food truck.  Now the thing for us
in this slideshow is to try to figure
out what happens when these new entrants
actually start appearing, and to give you
a preview.....what's going to happen is the
demand curve is going to shrink.  It's
going to move to the left, because of
course more
competitors offering similar things are
going to steal some of your customers.
It's also going to make your demand
curve flatter, because you're going to
have more substitutes and that means
that buyers have got other choices and
they're going to be a little more
sensitive to you raising prices.  The
long-run equilibrium, just like in
perfect competition, is going to be
achieved when there's no incentive to
enter or exite the industry, or put another
way we are going to reach long-run
equilibrium when profits equals zero.
Zero profit still won't attract any new
entrants and it's not driving people out
of the industry either.  Okay, so let's go
ahead and look at this graphically.  Let's
say that we're dealing with a brew pub
and this brew pub is a monopolistically
competitive firm and people are watching
them.   They're doing relatively well.  Other
people start saying,  "Okay, I brew beer in
my garage.  I think I can open up a brew
pub."  ... and they start doing that.   What
you're going to end up with then is that
our existing brew pub is going to
realize that they're going to start
losing demand.  Demand is going to shift
to the left and it's likely going to
flatten as well,  and of course when the
demand curve moves in to the left you've
got to realise that what you're dealing
with now is your marginal revenue curve
is going to move in as well.  Okay, so the
demand curve and the marginal revenue
curve moving in and flattening out is
not good news for our brew pub.  Our brew
pub is losing customers and people are
getting more sensitive about the prices
that they're charging...uh... lots of close
substitutes around as more and more
people enter.  We're going to essentially
see that the demand curve is going to
keep moving in to the left and the
marginal revenue curve is going to
follow it, and as they flatten out
they're moving in but your average total
costs--they're not.  Your ATC is staying
where its at.  It still costs the same amount
to produce that beer.  Eventually the
demand curve and the marginal revenue
curve have moved so far in that what
we're going to see
is that your Q star (that eventually
prevails) is just barely going to be able
to generate a price that's equal to the
ATC... So what you can see here is that our
green total revenue box is actually
going to be the same size as our red
average total cost box.  We've essentially
forced this firm into a break-even
scenario.  That means that their profits
are equal to zero-- no one wants to join
anymore.... and they're not being driven out
either.   They're doing as well as their
next best alternative.  Okay, what I want
you to recognize about this is that when
that ATC is tangent to your demand curve
this is the break-even scenario for a
monopolistically competitive firm, and
we're going to expect that that's where
they end up in the long run... okay?   So that
long-run equilibrium is going to have
some consequences.  Once you have enough
firms competing over the same amount of
buyers you are going to see that it
drives back Q star and they are going
to end up at a Q star that is directly
here.... and this Q star is not out here at
the minimum.   This minimum spot was where
you would have had a productively
efficient outcome... right?... If we were
producing at this Q, that Q would be
getting beer made at the lowest possible
cost.  As you had all of these people
enter in and fight you moved away
from more competitive to less
competitive scenarios.   You're going to
end up with them producing Q star.  now Q
star is still the way for them to
maximize profits, but I want you to
notice they are going to actually be
making those beers at a higher cost.  Okay
so it's productively inefficient.   You
could also think about this space
between the Q's as excess
capacity; they have the ability to
produce at lower costs but they are not
actually in a position where they are
doing that.  Okay on top of it being
productively inefficient you can see
that it's also allocatively inefficient. 
It's allocatively  inefficient because
our last unit of beer only cost us this
much to create, but people were actually
able to spend this much on it.  Implying
that its marginal benefit was much
higher than the cost of producing it, 
so from society's perspective this is
allocativley inefficient.  Now the firm
once again does not care-- that Q star is
the best way for them to actually get
your profit maximizing outcome-- your best
profits.  What's significant for us though
is you can see that price is actually
higher than what you would have paid,
keep in mind, under perfect competition
price would have been driven as a
minimum of the ATC....And quantity also
would have been out there at the minimum of
the ATC.  That's not happening either.
Quantity is going down while price is
going up... okay?.... This is why folks are
going to say that all of the imperfectly
competitive market structures are
inefficient to some extent.  As the curve
gets steeper and steeper like a
monopolist, the demand curve that is, this
is going to get worse and worse.   All
right, that should give you a pretty good
handle on monopolistic competition.
There's some other great stuff in the
chapter that talks about branding and
how monopolistically competitive firms
have got to constantly look for new
differentiations and a way to add value...
as well as find ways to lower costs.
That's really the recipe for how a mono
comp or a lot of your small mom-and-pops
businesses generate profits.
