Understanding Monopolistic Competition: Characteristics and Product Differentiation, Study notes of Reasoning

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Economics with Financial

Literacy

Mr. Ruggiero

Table of Contents

Identifying Market Structure “Monopolistic Competition” Targets “Monopolistic Competition” Targets Characteristics Product Differentiation How It Differs Product Differentiation Access Prior Knowledge Set Goals New Information Activity Conclusion

Identifying Market Structure

Show Answers _____ 1) Diamonds _____ 9) Tomatoes _____ 2) Wheat _____ 10) Strawberries _____ 3) Airline Travel _____ 11) Hair Salons _____ 4) Fast Food Restaurants _____ 12) Local Electric Company _____ 5) American Automobiles _____ 13) Breakfast Cereals _____ 6) Shampoo _____ 14) Retail Clothing Stores _____ 7) Cell Phone Service _____ 15) National Football League (NFL) _____ 8) Amtrak Train Travel _____ 16) Televisions The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below.

• Perfect Competition (PC)
• Monopolistic Competition (MC)
  • Oligopoly (O)
  • Monopoly (M)

Identifying Market Structure

_____ 1) Diamonds _____ 9) Tomatoes _____ 2) Wheat _____ 10) Strawberries _____ 3) Airline Travel _____ 11) Hair Salons _____ 4) Fast Food Restaurants _____ 12) Local Electric Company _____ 5) American Automobiles _____ 13) Breakfast Cereals _____ 6) Shampoo _____ 14) Retail Clothing Stores _____ 7) Cell Phone Service _____ 15) National Football League (NFL) _____ 8) Amtrak Train Travel _____ 16) Televisions The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below.

• Perfect Competition (PC)
• Monopolistic Competition (MC)
  • Oligopoly (O)
  • Monopoly (M)

M

PC

O

MC

O

MC

O

M

PC

PC

MC

M

O

MC

M

MC

Characteristics

Monopolistic competition has characteristics that make it similar to both

monopoly and perfect competition.

Characteristics

Monopolistic competition has characteristics that make it similar to both

monopoly and perfect competition.

1 ) Many Sellers

Each firm has a small amount of market power, but there is no possibility for collusion. Shampoo is a great example of just how many different firms can exist in a single market, all with differing prices and qualities.

Characteristics

Monopolistic competition has characteristics that make it similar to both

monopoly and perfect competition.

1 ) Many Sellers

Each firm has a small amount of market power, but there is no possibility for collusion.

2 ) Differentiated Products

Firms produce imperfect substitutes , products that are close substitutes but are still distinct.

3 ) Low Barriers to Entry

In the long run, firms are free to enter or exit the industry. Markets, such as hair salons, can see lots of new entrants in a short time if the market can support them. Likewise, many can fail quickly, too.

Characteristics

Monopolistic competition has characteristics that make it similar to both

monopoly and perfect competition.

1 ) Many Sellers

Each firm has a small amount of market power, but there is no possibility for collusion.

2 ) Differentiated Products

Firms produce imperfect substitutes , products that are close substitutes but are still distinct.

3 ) Low Barriers to Entry

In the long run, firms are free to enter or exit the industry. Markets, such as hair salons, can see lots of new entrants in a short time if the market can support them. Likewise, many can fail quickly, too.

4 ) Some Control Over Prices

How It Differs

The items below list how monopolistic competition differs from the other market

structures.

1 ) Perfect Competition

MC firms have some power to set prices, and products are not identical. Pizza restaurants have some ability to affect the price of their pizzas, but beyond a certain point people will simply purchase from a competitor.

How It Differs

The items below list how monopolistic competition differs from the other market

structures.

1 ) Perfect Competition

MC firms have some power to set prices, and products are not identical. All guitar manufacturers certainly make distinctive products, but most consumers would consider many guitars to be substitutes for each other.

2 ) Monopoly

MC firms do sell unique products, but imperfect substitutes provide competition.

Product Differentiation

One of the key features of monopolistic competition is product differentiation.

Firms can differentiate their products in one of three ways.

Product Differentiation

One of the key features of monopolistic competition is product differentiation.

Firms can differentiate their products in one of three ways.

1 ) By Style or Type

No two hair salons are alike. Each offers different hair styles based on gender, age, culture, income, preference, etc. Includes differences in features, design, packaging, or service.

Product Differentiation

One of the key features of monopolistic competition is product differentiation.

Firms can differentiate their products in one of three ways.

1 ) By Style or Type

3 ) By Quality

Some consumers are willing to pay more for higher quality products. Some professional stylists can charge hundreds of dollars per customer, but most consumers settle for something cheaper than that.

2 ) By Location

Consumers often choose a product based on convenience even if it is more expensive. Includes differences in features, design, packaging, or service.

Product Differentiation

OVERVIEW

Many of the products we buy come from monopolistically competitive

markets. The firms in these markets can increase their market power, which

equates to more revenue, by differentiating their products from their

competitors’ products. Firms can do this in three different ways: by style or

type; by location; or by quality.

DIRECTIONS

You need one set of “Product Differentiation Cards” and a “Product

Differentiation Dice.” Spread the cards out on your desk face down (like Go

Fish). One group member rolls the die and picks one card. The cards have

monopolistically competitive markets listed on them. Whatever is rolled on

the die tells you how to differentiate the market you drew. Write your

answers in the table. All group members take turns.