ECON 1050 Chapter Notes - Chapter 14: Monopolistic Competition, Product Differentiation

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Each firm has a small market share and so limited market power to influence the price of it"s product. Each firm is sensitive to the average market price but pays no attention to the actions of others. So no one firm"s actions directly affect the actions of others. Collusion or conspiring to fix prices is impossible. A firm in monopolistic competition practices product differentiation if the firm makes a product that is slightly different from the products of competing firms. Product differentiation enables firms to compete in three areas: quality, price, and marketing: Because firms produce differentiated products, the demand for each firm"s product is downward sloping. But there is a tradeoff between price and quality. Because products are differentiated, a firm must market its product. Monopolistic competition is a market structure in which: Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry.

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