Chapter 16 - Krugman_CH16_388 8:58 AM Page 388 chapter 1 6...

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>> RECENT BEST - SELLING BOOK TITLED Fast Food Nation offered a fasci- nating if rather negative report on the burgers, pizza, tacos, and fried chicken that make up so much of the mod- ern American diet. According to the book, all fast-food chains produce and deliver their food in pretty much the same way. In particular, a lot of the taste of your fast food—whatever kind of fast food it is—comes from food additives manufactured in New Jersey. But each fast-food provider goes to great lengths to convince you that it has something special to offer. Every- one recognizes Ronald McDonald the clown, a symbol of McDonald’s carefully cultivated image as the place kids love. Rival Wendy’s took a bite out of Mc- Donald’s market share with a little old lady yelling “Where’s the beef?”, a campaign that emphasized Wendy’s somewhat bigger burgers. So how would you describe the fast-food industry? On the one hand, it clearly isn’t a monopoly. When you go to a fast-food court, you have a choice among vendors, and there is real competition between the different burger outlets and between the burgers and Monopolistic Competition and Product Differentiation FAST-FOOD DIFFERENTIATION chapter 388 A What you will learn in this chapter: The meaning of monopolistic competition Why oligopolists and monopolis- tically competitive firms differ- entiate their products How prices and profits are deter- mined in monopolistic competi- tion in the short run and the long run Why monopolistic competition poses a trade-off between lower prices and greater product diversity The economic significance of advertising and brand names 16 Jeff Greenberg/PhotoEdit the fried chicken. On the other hand, in a way each vendor does possess some aspects of a monopoly: at one point McDonald’s had the slogan “Nobody does it like McDonald’s.” That was literally true—though McDonald’s competitors would say that they did it better . In any case, the point is that each fast-food provider offers a product that is differentiated from its rivals’ products. In the fast-food industry, many firms compete to satisfy more or less the same demand—the desire of consumers for something tasty but quick. But each firm offers to satisfy that demand with a dis- tinctive, differentiated product—products that consumers typically view as close but not perfect substitutes. When there are many firms offering competing, differenti- ated products, as there are in the fast-food industry, economists say that the industry is characterized by monopolistic competition . Competing for your tastebuds. Krugman_CH16_388 11/11/04 8:58 AM Page 388
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The Meaning of Monopolistic Competition Joe manages the Wonderful Wok stand in the food court of a big shopping mall. He offers the only Chinese food there, but there are more than a dozen alternatives, from Bodacious Burgers to Pizza Paradise. When deciding what to charge for a meal, Joe knows that he must take those alternatives into account: even people who nor-
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