Competition in a monopolistically competitive industry/ Managerial Economics
Question 1: Economists have taken opposite stands on the effect advertising can have on the level of competition in a monopolistically competitive industry. Describe how advertising could increase, and how it could decrease, competition in a monopolistically competitive industry?
Question 2: In an oligopolistic market, firms pay close attention to the strategies of their rivals. In monopolistic competition, with a large number of sellers, it is assumed that there is not this kind of rivalry, or interdependence. Why is there probably some rivalry in many monopolistically competitive markets?
Question 3: In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the higher the number of bidders, the higher the sales price.
For example, in two auctions of identical iPods, the one with the higher number of bidders brought a higher selling price. According to Galinsky, this explains why smart sellers on eBay set absurdly low opening prices (the lowest price that the seller will accept), such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky’s reasoning.
Hint. This question is related the concepts of consumer surplus and producer surplus you learned in the Principles of Microeconomics. These principles are applied in marketing techniques used by businesses.
