A Project Report on Economics Aspects for Launching New Product

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14

Monopolistic
Competition and
Product Differentiation

14.1 Monopolistic Competition
14.2 Price and Output Determination
in Monopolistic Competition

14.3 Monopolistic Competition Versus
Perfect Competition
14.4 Advertising

Restaurants, clothing stores, beauty salons, video stores, hardware stores, and coffee houses have elements of both competitive and monopoly markets.
Recall that the perfectly competitive model
includes many buyers and sellers; coffee
houses can be found in almost every town in
the country. You can even find Starbucks in
Barnes & Noble bookstores and grocery stores.
In addition, the barriers to entry of owning
an individual coffee shop are relatively low.
However, monopolistically competitive firms sell

400

a differentiated product and thus each firm has
an element of monopoly power. Each coffee store
is different. It might be different because of its
location or décor. It might be different because
of its products. It might be different because
of the service it provides. Monopolistically
competitive markets are common in the real
world. They are the topic of this chapter. ■

Chapter 14

SECTION

14.1

Monopolistic Competition and Product Differentiation

401

Monopolistic Competition
n What are the distinguishing features of

n How can a firm differentiate its product?

monopolistic competition?

What Is Monopolistic
Competition?

The Three Basic Characteristics
of Monopolistic Competition

onopolistic competition is a market structure
he theory of monopolistic competition is based on
where many producers of somewhat different
three characteristics: (1) product differentiation,
products compete with one another. For example,
(2) many sellers, and (3) free entry.
a restaurant is a monopoly in the sense that it has
a unique name, menu, quality of service, locaProduct Differentiation tion, and so on; but it also has many
One characteristic of monopolistic comcompetitors—others selling prepared monopolistic
petition is product differentiation—the
meals. That is, monopolistic competition
competition
accentuation of unique product qualia market structure
has features in common with both
ties, real or perceived, to develop a
with many firms selling
m onopoly and perfect competition,
specific product identity.
differentiated products
e ven though this explanation may
The significant feature of differensound like an oxymoron—like “jumbo product differentiation
tiation is the buyer’s belief that varishrimp” or “civil war.” As with monopgoods or services that ous sellers’ products are not the same,
are slightly different, or
oly, individual sellers in monopolistic
whether the products are actually difperceived to be different, c ompetition believe that they have
from one another
ferent or not. Aspirin and some brands
s ome market power. But monopoof over-the-counter cold medicines are listic competition is probably closer
examples of products that are similar
to competition than monopoly. Entry
into and exit out of the industry is unrestricted, and
consequently, the industry has many independent
sellers. In virtue of the relatively free entry of new
firms, the long-run price and output behavior, and
zero long-run economic profits, monopolistic competition is similar to perfect competition. However, the monopolistically competitive firm produces a
product that is different (that is, differentiated rather
than identical or homogeneous) from others, which
leads to some degree of monopoly power. In a sense,
sellers in a monopolistically competitive market may
be regarded as “monopolists” of their own particular
brands; but unlike firms with a true monopoly, competition occurs among the many firms selling similar Restaurants can be very different. A restaurant
(but not identical) brands. For example, a buyer livthat sells tacos and burritos competes with ing in a city of moderate size and in the market for
other...
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