Market Structure: Monopolistic Competition

If the set of all market structures were placed on a spectrum with perfect competition on the far left and monopoly on the far right, you'd find __monopolistic competition__ on the left-hand side, where competition is high and pricing power is low—just not to the extreme of perfect competition. In monopolistic competition, there are not as many but still a lot—perhaps dozens or hundreds. Competition is still fierce.

An industry’s market structure can have significant implications on producer decisions. For example, a firm that produces a homogeneous product may find that other firms are also easily capable of producing that product, thereby suggesting that barriers to entry are very low. With that in mind, how might you best describe barriers to entry for a monopolistically competitive firm?

No; they're low.

Yes.

When barriers to entry are very low and products are homogeneous, firms in that industry have little control over the price of their products. Taken to an extreme, these firms are called "price takers." With that in mind, which of the following best describes the pricing power of a monopolistically competitive firm?

No, they aren't.

You got it!

In a monopolistically competitive industry, products produced by each firm are typically close substitutes for their competitors’ goods. In fact, firms in this market structure go to great lengths to inform consumers of these differences—a tactic referred to as __product differentiation__. What do you think might be a good example of an effort to differentiate a product?

Incorrect. When thinking about product differentiation, consider the term “non-price competition,” which refers to competition between producers that involves aspects other than price.

Incorrect. This answer may be descriptive of other types of firm behavior, but it is not a form of product differentiation. When thinking of product differentiation, imagine a producer telling you how its product is better.

Correct! In this case, the producer is emphasizing taste (or perhaps choice), but product differentiation can extend far beyond one such aspect of a product. Differentiation strategies might emphasize location, convenience, quality, customer service, or many other product attributes. The monopolistically competitive firm’s products are not homogeneous, but they do serve as close substitutes for competitors' goods, so firms are compelled to demonstrate differences between their products and those of their competitors. When successful, firms achieve limited pricing power and can enjoy profits for longer periods. Firms not only produce goods that are different from their competitors, but those firms also go to great lengths to make the consumer aware of these differences.

In summary: [[summary]]

In monopolistic competition, assume that firms can enter the industry relatively easily. That does not necessarily mean they will be successful, just that they can enter with little cost.

These firms have some pricing power. And the extent to which they have pricing power depends at least in part upon the success they find in differentiating their product. If their product is truly unique (or at least perceived to be by consumers), then they may have more pricing power.

They're low

They're high

They are price takers

They are not price takers

A hamburger producer that claims its sandwich is the least expensive

An electronics producer that claims to match any competitor's prices

A sandwich producer that claims its sandwich has the greatest number of toppings

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