Question

Suppose that Disney was experiencing abovenormal profits. If Disney is a member of a monopolistically competitive industry, what would you predict would happen to the demand curve for Disney movies over time? Suppose that Disney is a member of an oligopoly. How would this change your answer?

Short answer

Answer: In a monopolistically competitive market, above-normal profits would attract more firms to enter the market, increasing competition and leading to a leftward shift in the demand curve for Disney movies, making it more elastic. In an oligopolistic market, the change in the demand curve for Disney movies would depend on the actions of other firms in the market, and it is difficult to predict a specific outcome.

Step-by-step solution

Market Structures Definition

In a monopolistically competitive market, there are many firms selling differentiated products. Each firm has some market power but also faces competition. In an oligopoly, there are a small number of large firms in the market, which results in substantial interdependence between the firms. Each firm might be uncertain about the reaction of its rivals to its actions.

Demand Curve in Monopolistically Competitive Market

When a firm in a monopolistically competitive market is experiencing above-normal profits, other firms will notice and enter the market, attracted by these profits. The new firms will also produce differentiated products, giving consumers more options. As the number of similar products increases, the demand curve for each individual firm will shift to the left, becoming more elastic. Since the consumers have more choices, they can easily switch to another product if prices for Disney movies go up, leading to a decrease in the demand for Disney movies.

Prediction for Disney Movies in Monopolistically Competitive Market

In a monopolistically competitive industry, we would predict that the demand curve for Disney movies would shift to the left over time, as more firms enter the market, offering more alternatives to consumers.

Demand Curve in Oligopolistic Market

In an oligopoly, the behavior of one firm directly influences the behavior of the other firms in the market. If Disney was experiencing above-normal profits, it's possible that the other firms would also benefit from these profits, either by collusion or by imitating Disney's successful strategies. In this case, the demand curve for Disney movies might not necessarily shift to the left, as it would depend on the actions taken by the other oligopolistic firms.

Prediction for Disney Movies in Oligopolistic Market

In an oligopolistic industry, the change in the demand curve for Disney movies would depend on the actions of other firms and the extent to which they are able to maintain their market share or manipulate the market through collusion or strategic behavior. It's difficult to predict a specific outcome, as it would depend on these factors.

Key concepts

Monopolistic Competition

Imagine walking down an aisle filled with different brands of cereal, similar yet each presenting a unique flavor or nutritional claim. This is a classic example of monopolistic competition, where numerous producers offer products that are distinctive but essentially serve the same purpose. In such a market, companies like Disney have some power to set prices due to brand loyalty, but they also face fierce competition from other firms with alternative, yet similar, products.

As new competitors enter the market, drawn by high profits, the enchantment of Disney movies might face a test. The choices available to the audience widen, leading to a more elastic demand curve for Disney's movies. This elasticity indicates that consumers are responsive to changes in price or product variation, ready to jump ship to another brand if it offers a better deal or a new thrill. As a result, Disney’s once 'magic kingdom' of demand becomes a little more ordinary, and the demand curve for their movies shifts to the left, pointing to a decrease in demand at any given price.

In such a dynamic environment, Disney must continuously innovate to differentiate their films and maintain their appeal, whether through stunning animation, compelling storytelling, or leveraging their iconic characters. It's this continuous game of attraction and retention that keeps monopolistically competitive markets so vibrant.

Oligopoly

Now let’s shift the scene to a high-stakes poker game, with only a few players holding most of the chips. This scenario is akin to an oligopoly, a market dominated by a small number of large firms. In this exclusive club, the actions of one player, like Disney, can cause ripples that affect the strategies of others at the table.

If Disney rakes in higher-than-normal profits, their rivals, who are also giants in their right, notice and may react strategically. They could mimic Disney’s methods, forge their own paths to innovation, or even engage in collusion, subtly banding together to set market standards. The effect on the demand curve for Disney movies isn’t as predictable as in monopolistic competition. Rather than shifting to the left, the demand could stabilize or even increase if all the oligopolistic firms manage to grow the market together.

The interconnectedness between firms in an oligopoly creates an environment where strategic plays are critical. Disney knows that releasing a blockbuster movie isn’t just about viewership numbers, it's about outmaneuvering its few but considerable rivals. This interdependent dance shapes not only their profits but the landscape of the industry at large.

Demand Curve Elasticity

Think about a rubber band - if it’s elastic, it stretches easily with a light pull. Similarly, the demand curve elasticity measures how much the quantity demanded of a product responds to changes in its price. In the case of Disney movies, under monopolistic competition, there's a significant amount of elasticity as consumers have plenty of other movies to choose from. If prices go up, or if the perceived value goes down, viewers can and will opt for other filmmakers’ offerings with ease.

In an oligopoly, the demand curve’s elasticity for Disney movies may be a bit more complicated. Depending on the choices of the other major players, Disney's demand could become less elastic, meaning that a price increase might not lead to a significant drop in quantity demanded. This could occur if there are strong brand loyalties, high barriers to entry for new competitors, or tacit agreements among the existing firms to keep prices stable.

The analysis of demand curve elasticity is crucial for Disney to decide on pricing strategies. In a marketplace with high elasticity, they would face more pressure to keep prices competitive. In contrast, in an oligopolistic market with low elasticity, Disney could potentially exercise more power over pricing without losing a significant number of customers.