Economics / Unit 5: Market Structures and Competition
5.3 Monopolistic Competition
Notes
Monopolistic competition has many sellers offering similar but differentiated products, with low barriers to entry.
- Product differentiation: making a product seem different through brand, style, quality, location or service.
- Firms have a little control over price, because loyal customers may pay a bit more, but many close substitutes keep prices from rising far.
- Nonprice competition: competing through advertising, packaging, location, customer service and quality rather than price.
- Low barriers mean that long-run profits attract new competitors.
- Examples: restaurants, clothing stores, hair salons, coffee shops.
Practice
A neighborhood has 20 coffee shops, each with its own drinks, decor and loyalty program. The market structure is:
Many sellers offer similar but differentiated products.
A sandwich shop offers free Wi-Fi and comfortable seating instead of lowering its prices. This is an example of:
It competes for customers through features other than price.
Why can a popular hair salon charge somewhat more than others in town, but not much more?
Differentiation gives a little pricing power, while competitors limit it.
Ready for more? Take the Unit 5 test.