Chapter 11

Chapter 11 - Chapter 11 Monopolistic Competition Examples:...

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Chapter 11 Monopolistic Competition Examples: fast-food, toothpaste, soap, shampoo, cold medicine, etc. Brands of toothpaste: Crest, Colgate-Sub-brand of Colgate: Shrek Bubble Fruit http://images.search.yahoo.com/search/images? Characteristics: Monopolistic competition has three key characteristics: 1) Each firm competes by selling differentiated products. The differentiated products are highly substitutable but are not perfect substitutes like under perfect competition (i.e. the cross price elasticity of demand between the products of the firms is high but not infinite). Crest is different from Colgate, Aim, and Close-up… etc. Therefore, because of differentiation there is consumer loyalty on part of some consumers. Consumers are willing to pay 25¢ to 50¢ more (but may be not a 1$). Therefore, Proctor &Gamble has some but limited monopoly power. However, some of the customers may move to the substitutes. Therefore, advertising is important under monopolistic competition. 2) The demand curve is downward sloping but is fairly price elastic . The demand elasticity for crest is –7. Thus, because of its limited monopoly power, P&G charges a price that is higher than marginal cost but not much higher. 3)
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This note was uploaded on 01/12/2012 for the course ECON 201 taught by Professor Joyce during the Fall '07 term at Drexel.

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Chapter 11 - Chapter 11 Monopolistic Competition Examples:...

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