Monopolistic
Competition
Introduction
John Locke is the author of crime-adventure e-books
selling for 99 cents at Amazons website. When he saw
that successful authors were charging $9.99 for their ebooks, he expressed a confidence that he would have
customers who feel that the other books are not
necessarily ten times better than his.
E-books are an example of a product that exhibits
product differentiation, a fundamental characteristic of
monopolistic competition. In this chapter, you will learn
why the growing importance of e-books has complicated
the process of selling both e-books and physical books.
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Learning Objectives
Discuss the key characteristics of a monopolistically
competitive industry
Contrast the output and pricing decisions of
monopolistically competitive firms with those of
perfectly competitive firms
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Chapter Outline
Monopolistic Competition
Price and Output for the Monopolistic
Competitor
Comparing Perfect Competition with
Monopolistic Competition
Brand Names and Advertising
Information Products and Monopolistic
Competition
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Monopolistic Competition
In the 1920s and 1930s, economists were
aware of industries that did not fit under
perfect competition or pure monopoly
Theoretical and empirical research was
instituted to develop some sort of middle
ground
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Answer
It should be carried to the point at which the
additional revenue from one more dollar of
advertising just equals that one dollar of
additional cost
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Answer
Demand curve for individual perfect competitor
is perfectly elastic
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Methods of Advertising
Direct Marketing
Advertising targeted at specific consumers: email, regular mail
Mass Marketing
Advertising intended to reach as many
customers as possible: radio, TV, newspaper
Interactive Marketing
Permits consumer to follow up directly by
searching for more information
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Experience Good
A product that an individual must consume
before the products quality can be established
Credence Good
A product with qualities that consumers lack the
expertise to assess without assistance
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Persuasive Advertising
Advertising that is intended to induce a
consumer to purchase a particular product and
discover a previously unknown taste for an item
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