and Product Differentiation
Use the three conditions for monopolistic competition discussed in the chapter to
decide which of the following firms are likely to be operating as monopolistic com-
petitors. If they are not monopolistically competitive firms, are they monopolists,
oligopolists, or perfectly competitive firms?
A local band that plays for weddings, parties, and so on
Minute Maid, a producer of individual-serving juice boxes
Your local dry cleaner
A farmer who produces soybeans
The three conditions for monopolistic competition are (1) a large number of produc-
ers, (2) differentiated products, and (3) free entry and exit.
There are many bands that play at weddings, parties, and so on. There are no sig-
nificant barriers to entry or exit. And products are differentiated by quality (for
instance, some bands have better musicians or better electronic equipment) or by
style (for instance, different bands play different types of music). All three condi-
tions for monopolistic competition are fulfilled.
The industry for individual-serving juice boxes is dominated by a few very large
firms (for example, Minute Maid, Welch’s, and Kool Aid), and there are signifi-
cant barriers to entry, in part because of the large costs (for example, advertising)
involved in gaining any market share of the national market. Products are, howev-
er, differentiated—in some cases, the only differences are in the minds of con-
sumers. Because of the small number of competitors, the industry is closer to
There are a large number of dry cleaners, and each produces a product differenti-
ated by location: customers are likely to prefer to use the dry cleaner closest to
their home or workplace. Finally, there are no significant barriers to entry. This is
a monopolistically competitive market.
There are a large number of soybean farmers, and there is free entry and exit in
this industry. However, soybeans are not differentiated from each other—they are
a standardized product. No individual soybean farmer has market power. This
industry is therefore a perfectly competitive industry.
You are thinking of setting up a coffee shop. The market structure for coffee shops is
monopolistic competition. There are three Starbucks shops, and two other coffee
shops very much like Starbucks, in your town already. In order for you to have some
degree of market power, you may want to differentiate your coffee shop. Thinking
about the three different ways in which products can be differentiated, explain how
you would decide whether you should copy Starbucks or whether you should sell cof-
fee in a completely different way.