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By the end of this section, you will be able to:

  • Explain the significance of differentiated products
  • Describe how a monopolistic competitor chooses price and quantity
  • Discuss entry, exit, and efficiency as they pertain to monopolistic competition
  • Analyze how advertising can impact monopolistic competition

Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell different kinds of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. However, firms producing such products must also compete with other styles and flavors and brand names. The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition, and the following Clear It Up feature introduces its derivation.

Who invented the theory of imperfect competition?

The theory of imperfect competition was developed by two economists independently but simultaneously in 1933. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition . The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition . Robinson subsequently became interested in macroeconomics where she became a prominent Keynesian, and later a post-Keynesian economist. (See the Welcome to Economics! and The Keynesian Perspective chapters for more on Keynes.)

Differentiated products

A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product, location from which the product is sold, intangible aspects of the product, and perceptions of the product. Products that are distinctive in one of these ways are called differentiated products .

Physical aspects of a product include all the phrases you hear in advertisements: unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. The location of a firm can also create a difference between producers. For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. Finally, product differentiation may occur in the minds of buyers. For example, many people could not tell the difference in taste between common varieties of beer or cigarettes if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

Questions & Answers

the forces of dd and ss
Kemg Reply
how did you get 2900
mba Reply
what's equillibrium price
Begmee Reply
it is a Price at which there is no tendency for both the quantity demanded and quantity supplied to change.
Atanga
what is joint demand
Alejandro Reply
joint demand?
Isma
is when two commodities relate together
Emmanuel
it refers to the demand for two commodities that are jountly consumed or used together
Atanga
It is when commodities are used together
Addo
who is a conspicuous consumer
Atanga
what are subnormal profits in ecos
Tawe Reply
what is an ancient tiger
emmanuel Reply
The Four Asian Tigers, Four Asian Dragons or Four Little Dragons, are the economies of Hong Kong, Singapore, South Korea and Taiwan, which underwent rapid industrialization and maintained exceptionally high growth rates between the early 1960s and 1990s.
Napoleon
It is not correct.
Nelly
state ur own na mr correct
Napoleon
who told u?
Napoleon
u are correct
emmanuel
woow I never knew that
Birungi
ask
Foday
a
Foday
what is GDP
Lamin
gross domestic product
Tawe
I want to see unemployment essay
Mmonwa Reply
hello
Birungi
Inflation is defined as the rise in price of a commodity.
Nureni Reply
It is defined as the rise in price of a commodity.
Nureni
the persistent rise in the prices of goods and services. or commodities.
SULEIMAN
pls the third and fourth law of supply
Yarouh
what's GDP?
Allen
gross domestic product
Annor
GDP stands for Gross Domestic Product
Sande
yes
HlobisileM
what us maxima and minima
MiXUP Reply
Maxima s below equilibrium. Whilst minima s above. Equilibrium
Afran
Wht is demand
Afran
is the willingness and the ability of a consumer to purchase goods at a given price and at a particular point in time.
Assan
Ohhk different question? Ask
Afran
why is the demand curve downwards sloppy?
Assan
3 Reasons.. 1... diminishing marginal utility 2... substitution effect 3...income effect
Harshita
thanks
Assan
Because of the negative or inverse relationship between price and quantity demanded
Afran
what is the law of diminishing returns states?
Assan
ohk
Assan
The law states that all other things being equall as much of variable factor(labour) is employed on fixed factor(land) the marginal product rises..attain a maximum and begins to fall.
Afran
What is income elasticity of demand
Afran
what is monetary policy
Edward
Monetary policy is an attempt to influence the economy by opera ting in such monetary variables
Afran
thanks
Edward
Wlcm
Afran
Wht is disutility?
Afran
is disutility? is rightly writing?
Yhlas
is it i wanna say
Yhlas
Yes please Disutility
Afran
what is macro economics?
Oyas
the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
idk
in other words it is the study of the economic as a whole
idk
What is an Economic growth
Ayumo Reply
Economic growth is the process whereby the real per capita income of an economy increases over a long period of time.
Nureni
what is the generally accepted defination of economics and by who
IDY Reply
Economics is defined by Lionel Robbins as a social science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Tba
Lionel Robbins definition is the best and acceptable definition of Economics.
MUNTARI
Importance of economic
Achike Reply
Helps in decision making
MP
I need like 5 importance
Achike
hi
Physcal
Hey
Muhammad
hellow dear.
juwel
hello
Al-ameen
Hello
MP
it helps an individual in rational decision making process
Assan
Fine and u
Buzabaryaho
how does it make individual in rational dicision making decisions
Annor
if an individual is faced with unlimited wants.
Assan
it also helps an individual in arranging their wants in order of their importance.
Assan
ohk
Annor
ok
Al-ameen
Hello guys
Radah
My name is Radah
Radah
Please what is a scale of preference used for?
Radah
it's use for arranging wants in order of their importance.
Assan
in other words when an individual is faced with unlimited wants,scale of preference would help the individual to select the most important wants.
Assan
Thanks
Radah
welcome
Assan
what is tourism
forgive Reply
Tourism is travel for pleasure or business
Yusuf
It is the commercial organization and operation of holidays and visits to places of interest.
Nureni
who is a price taker?
sam Reply
A price taker is a person or a company who have no control to dictate a prices of a goods or services
Unique
Someone who sets price
Nureni
In the trading world, a price taker is a trader who does not affect the price of the stock if he or she buys or sells shares.
Nureni
A price taker refers to a firm or an individual who sets the price of his good and services based on an external factor. In other words he cannot choose and set a price by himself. An example is a firm operating in perfect competition where prices are set through the price mechanism.
Tba
in a common and suitable sense state the law of diminishing returns
Unique Reply
The higher the satisfaction derived from a particular commodity,the lower the demand for it but that law doesn't match in some instances.
Nureni
state the features of an imperfect competitive market
Naomi
@NURENI instance like wat
Unique
imperfect competitive market involves large number of sellers and buyers price makers selling cost product differentiation free entry and exit of a firms
Unique

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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