Figure 112

Price/Output Combinations Under Monopolistic Competition

Long-run equilibrium under monopolistic competition occurs when MR = MC and P = AC. This typically occurs between (P2, Q2) (the high-price/low-output equilibrium) and (P3, Q3) (the low-price/high-output equilibrium).

$ per unit

Price/Output Combinations Under Monopolistic Competition

Long-run equilibrium under monopolistic competition occurs when MR = MC and P = AC. This typically occurs between (P2, Q2) (the high-price/low-output equilibrium) and (P3, Q3) (the low-price/high-output equilibrium).

$ per unit

Although perfect competition and monopoly are somewhat rare in real-world markets, monopolistic competition is frequently observed. For example, in 1960 a small ($37 million in sales) office-machine company, Haloid Xerox, Inc., revolutionized the copy industry with the introduction of the Xerox 914 copier. Xerography was a tremendous improvement over electro-fax and other coated-paper copiers. It permitted the use of untreated paper, which produced clearer and less expensive copies. Invention of the dry copier established what is now Xerox Corporation at the forefront of a rapidly growing office-copier industry and propelled the firm to a position of virtual monopoly by 1970. Between 1970 and 1980, the industry's market structure changed dramatically because of an influx of competition as many of Xerox's original patents expired. IBM entered the copier market in April 1970 with its Copier I model and expanded its participation in November 1972 with Copier II. Eastman Kodak made its entry into the market in 1975 with its Ektaprint model. Of course, Minnesota Mining and Manufacturing (3M) had long been a factor in the electrofax copier segment of the market. A more complete list of Xerox's recent domestic and international competitors would include at least 30 firms. The effect of this entry on Xerox's market share and profitability was dramatic. Between 1970 and 1978, for example, Xerox's share of the domestic copier market fell from 98 percent to 56 percent, and its return on stockholders' equity fell from 23.6 percent to 18.2 percent.

More recently, Xerox's leadership position has been squandered and its profitability has collapsed in the face of vicious price and product quality competition. Because Canon, Kodak, 3M, Panasonic, Ricoh, Savin, and Sharp copiers are only close rather than perfect substitutes for Xerox machines, the industry is commonly described as monopolistically competitive. Effective (but imperfect) competition for paper copies also comes from low-cost printers tied to PCs and from electronic communications, which obviate the need for paper copies. Make no mistake about it, monopolistic competition can be tough on industry leaders that fail to keep up—just ask Xerox.

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