Answer to Question #149829 in Economics for Tim

Question

If competitors in an industry sell slightly different products and some customers are willing to pay a little more for an individual firms differentiated product then the industry would be described as

Answer 1

This situation describes the monopolistic competition.

There are many firms operating on the market, and among them, there are either no large ones at all, or they do not have decisive advantages over small ones and are adjacent to them. The barriers to entering such a market are relatively low: to open a workshop for the production of upholstered furniture or a fashionable hairdressing salon, large capital is not needed, and it is difficult for competitors to prevent this. Leaving the market is usually not difficult - there are always buyers willing to buy a small business.

Why, under such liberal conditions prevailing in this type of market, competition is still not perfect? The reason lies in that very noticeable feature of the market of monopolistic competition - in the variety, differentiation of the product.

The product produced by each company is somewhat different from the products of other companies. Any of the manufacturers occupy a kind of “mini-monopolist” position (the only manufacturer of a specific narrow variety of a given product) and has a certain power in the market. Moreover, out of habit, the ear-cutting phrase “mini-monopolist” is not just a metaphor, but an accurate reflection of the essence of the situation.

Indeed, each firm, operating in monopolistic competition, controls only a small share of the total market for the product concerned. However, product differentiation leads to the fact that the single market breaks up into separate, relatively independent parts, called market segments. And in such a market segment, the share of even a small company can become very large.

Differentiation of products arises from the existence of differences between them in quality, service, and advertising. Let's take a closer look at each of these product differentiation factors.

First of all, we emphasize that quality is not a one-dimensional characteristic, i.e. is not limited to evaluation, bad or good. Even the basic consumer properties of the simplest products are surprisingly diverse. So, toothpaste should: a) clean the teeth, b) disinfect the oral cavity, c) strengthen the enamel of the teeth, d) strengthen the gums, e) be pleasant to the taste, etc. And all these properties can be harmoniously combined in one product only as an exception. In many cases, gaining in some property of the product inevitably leads to a loss in another. In our example, the introduction of effective detergents and disinfectants into the paste irritates the gums, and the best medicinal pastes rarely taste good. Therefore, the selection of priorities in the main consumer qualities opens up opportunities for a wide variety of products. And they all become unique in their own way: one paste strengthens the gums better, another tastes better, the third whitens teeth, etc.

Additional consumer properties can also serve as a basis for differentiation, i.e. those features of the product that affect the ease or convenience of its use, for example, different sizes of packaging, differences in packaging, etc.).

An important quality characteristic of a product is its location, which is crucial for retail and many types of services. So, if the network of gas stations is sparse, then the nearest gas station automatically becomes a monopolist for its neighborhood.

 

Finally, even imaginary qualitative differences between them can serve as the basis for product differentiation. In particular, it has long been known that a significant percentage of smokers on test trials are unable to distinguish "their" brand from others, although in ordinary life they faithfully buy only it. Let's pay special attention to this circumstance: from the point of view of consumer market behavior, it does not matter whether the products really differ. The main thing is to think so to him.