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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

how may I solve arithmetic mean ,,,all example
Cee Reply
what is agriculture
Itoe Reply
simple method of understanding cost concept
Oludare Reply
what is inflation
Christiana Reply
Inflation is a general increase in price levels
Zuko
is the action of inflating something
Abdifatah
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
Tetteh
inflation is the general increase of a commodity in a particular period of time.
Turay
inflation is a general increase in price levels of commodities
shehu
what are the types of inflation?
Ebrima
inflation is the period of persistent rise in the general level of the price of goods services over time
Emmanuel
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
Emmanuel
how can a location of a firm create difference between producers
joy Reply
what is monetary policy
joy
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Abdifatah
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Abdifatah
What would you say about the the mobility of enterprise as a factor of production?
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Uhara Reply
Essay about Microsoft
Kwena Reply
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Julie Reply
what do you mean by means in economics
Julie
economic is the wealth of a country.
Moussa
monetary policy is refer to as being expansionary or contractionary.
Abdul
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Au
money market is base on short term loan which is within one year period while capital market is long term loan more than one year...
Muhammad
money market is a market were short term loans are dealt with while capital market is a market were long term loans are traded
Ebrima
What is mean by monetory policy
Lovely
monetary polices are rules that control the rate of monetary exchange in an economic as a whole.
Ebrima
wealth of the nation
Uhara
important of unemployment
Otwe Reply
Important of unemployed
Otwe
important?
Aneela
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ABDULLAHI Reply
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Abdul
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Zuko
less ability for the available goods and services that's on sale
kanu
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joy
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Brenda Reply
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Brenda
by export trading
Jayah
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Danjuma
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Yakubu
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Rashid
definition of economics according to Adam Smith
Ijeoma Reply
economic is a wealth of nation
Au
in the view of Adam Smith economics is the study of activities of people in production of wealth
suresh
Economics is any human activity that lead to the provision of substance and or amassing wealth.

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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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