MONOPOLISTIC COMPETITION Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

MONOPOLISTIC COMPETITION l The market type most consumers are familiar with is monopolistic competition a most consumer goods meets the definition of this market l The key concept here is the companies make their products slightly different to appeal to varying consumer tastes. Most of these products can be made in an endless variety.

MONOPOLISTIC COMPETITION l Despite elaborate advertising claims, many consumer products only vary in color, texture, and scent. All soaps perform equally well as do all cold remedies. l So why spend billions on advertising. If I can convince you that my coffee is better because it has a darker richer color, then you will pay a bit more for it.

MONOPOLISTIC COMPETITION l If I convince you that only sophisticated people drink this brand of coffee and you will impress other people if you serve it, you will pay a bit more for it. l If I convince you that your sex life will take on a whole new meaning if you use my brand of coffee, you’ll pay a lot more for it.

MONOPOLISTIC COMPETITION l Of course, no one takes these claims literally, but advertising is trying to create a subconscious feeling when you shop for the product. l The idea is to only try to sell the product, such as shampoo, only to a subset of people such as people, who for example, think their hair is oily. l This is why the same company puts out multiple brands and multiple variations of each brand.

MONOPOLISTIC COMPETITION l In the short run these markets look like mini monopolies as illustrated on page 225. l In the long run any successful idea will be copied, thereby eroding any economic profits.

MONOPOLISTIC COMPETITION l Any company with a new variation of a product that the public likes, such as clear products, remember Pepsi Clear a few years ago, will have a monopoly position and can charge a price that produces economic profits. l Needless to say if Pepsi Clear is a success, Coke Clear cannot be far behind. As more brands split the clear market, the demand for any one brand drops. This lowers prices and eliminates the economic profits.

LONG RUN ADJUSTMENT