Figure 10.2 offers a reminder that the demand curve as faced by a perfectly competitive firm is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price. PERCEIVED DEMAND FOR A MONOPOLISTIC COMPETITORĪ monopolistically competitive firm perceives a demand for its goods that is an intermediate case between monopoly and competition. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The concept of differentiated products is closely related to the degree of variety that is available. Advertising can play a role in shaping these intangible preferences. 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. Finally, product differentiation may occur in the minds of buyers. 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. Intangible aspects can differentiate a product, too. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory. For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. The location of a firm can also create a difference between producers. 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. Products that are distinctive in one of these ways are called differentiated products. (See The Keynesian Perspective modules for more on Keynes.) DIFFERENTIATED PRODUCTSĪ 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. Robinson subsequently became interested in macroeconomics where she became a prominent Keynesian, and later a post-Keynesian economist. The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition. The theory of imperfect competition was developed by two economists independently but simultaneously in 1933. Who invented the theory of imperfect competition? The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition. However, firms producing such products must also compete with other styles and flavors and brand names. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. 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. Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way.
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