ECON 1000 Lecture Notes - Lecture 8: Monopolistic Competition, Product Differentiation, Sports Equipment
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Monopolistic competition is a market structure in which. Firms compete on product, quality, price and marketing. Firms are free to enter and exit the industry. The presence of a large number of firms in the market implies. Each firm has only a small market share and therefore has limited market power to influence the price of its product. Each firm is sensitive to the average market price, but no firm pays attention to the actions of others. No one firm"s actions directly affects the actions of the others. Collusion, or conspiring to fix prices, is impossible. A firm in monopolistic competition practices product differentiation if the firm makes a product that is slightly different from the products of competing firms. Product differentiation enables firms to compete in three areas: quality, price and marketing. Because firms produce differentiated products, the demand for each firm"s product is downward sloping. There is a tradeoff between price and quality.