Competitive Markets - Valaer 1 Sam Valaer ECON 280 The...

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Sam Valaer ECON 280 5/1/11 The Price to be Different In order to study competitive markets, several things must be assumed before any progress can be made. One such assumption is that there are no barriers to entry or exit. Restaurants can be used as an example of this, as the lack of barriers to entry is part of what makes this market so competitive. A second assumption is that both producers and consumers are price takers. Thirdly, it can be assumed that although there can be some differentiation among products offered by producers, they are relatively homogenous and that it costs money to create a recognizably different product. The fourth and last assumption is that firms that spend money to distinguish their product will attempt to cover the costs of doing so by raising their prices. This last point is what brings about the following question: Considering that it costs a firm money to differentiate its product in a competitive market, is this expenditure worth the results? If so, how much should be spent to differentiate a product? If not, then why? An interview presented by Suong Jian and Yan Liu at the Guangdong University of Finance offered an answer to this question. When asked if the commonly seen effort by competitive firms to differentiate their product was wasteful, Suong and Liu argued
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