Monopolistic Competition

The last category of imperfect competition is.monopolistic competition; this occurs when a large number of sellers produce differentiated products.

This market structure resembles perfect competition in that there are many sellers. none of whom have a large share of tile market. It differs from perfect competition in that the products sold by different firms are not identical. Differentiated products arc ones whose important characteristics vary. Personal computers, for example, have differing characteristics such as speed, memory, hard disk, modems, size. and weight. Because computers are differentiated. they can sell at slightly different prices.

The classic case of monopolistic competition is the retail gasoline market. You may go to the local Exxon station. even though it charges slightlv more. because it your “ray to work. But if the price at Exxon rises more than a few pennies above the competition, you might switch to the Mobil station a short distance away.

Indeed. this example illustrates that ‘one important source of product differentiation is location. It takes time to go to the bank or the grocery store, and the amount of time needed to reach different stores will affect our shopping choices. In economic language, the total opportunity cost of goods (including the cost of time) will depend upon how far we live from a store. Because the opportunity cost of local shops is lower, people generally tend to shop in nearby locations. This ‘consideration also explains why large shopping complexes are so popular: ‘they allow people to buy a wide variety of goods while economizing on shopping time. The product differentiation that comes from different locations is an important reason why retail trade tends to be a monopolistically competitive market.- Product quality is an increasingly important part of product differentiation today. Goods differ in their characteristics as well as their prices. Most IBM-compatible personal computers these days can all run the same software, and there are many manufacturers.

Yet the personal computer industry is a monopolistically competitive industry, because computers differ in speed, size, memory, repair services, and ancillaries like CD-ROMs. internal modems, and sound systems. Indeed. a whole batch of monopolistically competitive computer magazines is devoted to explaining the differences between the computers produced by the monopolistically competitive computer manufacturers!

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