Ii consumers do have special preferences for the

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ii. Consumers do have special preferences for the products of a specific seller and within limits will pay a higher price to satisfy those preferences. The reason why not a firm looses or attracts all consumers when price increases or decreases, respectively and consumers are willing to pay a higher price for a product of a specific firm is due to brand loyalty . This means that whatever the change in the price of other firms’ products people may not switch their consumption to other brands. The best example for this is the survey conducted regarding the demand for Sharp brand electronics products in Manchester (England) 1990’s. In 1990’s a Japanese company that produce Sharp brand was the official sponsor of Manchester United Football Club. During that decade, there was a decline in the prices of other brands of TV sets and refrigerators. In spite of this, the survey conducted on Manchester United Football Club funs confirmed that no significant reduction in the sales of the company was registered in the city. This was because the funs keep on consuming the product of the firm (Sharp brand) that sponsor and made the club financially strong. This example therefore best explains how brand loyalty due to non- price competition is stronger than price reduction under monopolistic competition. 6.3 Cost Functions of Monopolistic Competitive Firms Cost structure of a firm under monopolistic competition is similar to that of any other firm (perfectly competitive and monopoly firm). The AVC, MC, ATC are all U-shaped implying that there is only single level of output which can be optimally produced. There is another cost, the cost of selling activities, which is introduced in the theory of the firm by Chamberlin. The recognition of product differentiation provides the rationale for the selling expenses incurred by the firm. With advertising and other selling activities the firm seeks to differentiate more his product from the products of other firms in the group. Chamberlin assumes that advertising will shift the demand and will make the demand less elastic. 75 | P a g e
Total cost = Production cost + Selling cost. Like any other costs the average selling cost is U-shaped. That means there are economies and diseconomies of selling cost as output increases. Figure 6.2 selling cost of monopolistic competitive firm Initially, expansion of output will not require an equi-proportional increase in selling costs, and this leads to a fall in the average selling expenditure. However, beyond a certain level of output, the firm will have to spend more per unit in order to attract customers from other firms. The U shaped average selling cost, added to U shaped average production cost, yields a U shaped ATC curve. 6.4 The Concept of Product Group and Industry In perfectly competitive market, firms included in an industry are easy to determine because they all produce same product. But product differentiation creates difficulty in the analytical treatment of the industry.

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