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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

what is choice?
Hilma Reply
Suppose a country with fixed quantities of resources is able to produce any of the following combinations of bread and ovens;
opoku Reply
willingness and ability to buy at a market price at time specified
Joel Reply
demand
JONZY
discuss the meaning of demand in economic
Usman Reply
the willingness and ability to buy a commodity
Rifat
just try to elucidate
Aadil Reply
just try to elucidate something
Aadil
what
Ashfaq
would you explain
azad
what is elasticity, perfectly elastic, inelastic
Rue Reply
When 01 the demand is elastic
Myriam
when demand curve is horizental the curve is perfectly elastic ...when demand curve is vertical then it is perfectly inelastic
Ashfaq
elasticity means that percentage change in quantity demanded due to percentage change in price
Ashfaq
Refers to the level or degree of sensitivity quantity demanded has in my relationship to a change in price
JONZY
introduction to elasticity of demand
Dalhatu Reply
what is price commonly called in the labour market
AYUBA Reply
wages?
penn
Explain demand curve
Ibrahim
price in labour market is Marginal Physical Productivity...
azad
what is the price of elasticity of demand
Mahesh Reply
it is the responsiveness of a certain good. and it is calculated as follows: PED=%change in quantity demanded /%change in price
Rue
what is per capita income
Kafwimbi Reply
what is GDP of an economy
Kafwimbi
Gross Domestic Product
grace
GDP=C+I+G(X-M) C= CONSUMPTION I=INVESTMENT G=GOVERNMENT EXPENDITURES (X-M) = export - import
Sayali
What are the factors that drive exchange rates?
MacFisto
Why is scarcity the main problem of economics
Nicholas Reply
Because of unlimited needs and wants demanded by the household
Jeremiah
what is GDP deflator?
saud
Because of endless needs and wants required to achieve maximum satisfaction possible by consumers
Nobert
how to calculate price elasticity demand?
Precious Reply
change in quantity over quantity divided by change in price over price
Pele
Percentage change in quantity demanded over the percentage change in price
Nobert
if the local pizzeria raises the price of a medium pizza from Rd.60to 100 & quantity demanded falls from 700 pizzas a night to 100 pizzas at night , the price elasticity of demand for pizzas is:
Lakshmi Reply
1.2. Measurement of price Elasticity of demand
Lakshmi
0.11
Nobert
Lakshmi tell me how wrong am I coz I see you've got different answer from mine?
Nobert
_1.28
Melvis
explain how price and output are determind by a discriminating monopolist
Hiraj Reply
price and output determined through interaction between demand curve and supply curve...
Ajay
how do I view the graphs
Patricia Reply
how do I open the links
Patricia

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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