ii.Consumers do have special preferences for the products of a specific seller and within limits will pay ahigher price to satisfy those preferences. The reason why not a firm looses or attracts all consumerswhen price increases or decreases, respectively and consumers are willing to pay a higher price for aproduct of a specific firm is due to brand loyalty. This means that whatever the change in the price ofother firms’ products people may not switch their consumption to other brands. The best example forthis 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 ofManchester United Football Club. During that decade, there was a decline in the prices of other brandsof TV sets and refrigerators. In spite of this, the survey conducted on Manchester United Football Clubfuns confirmed that no significant reductionin 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 andmade 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 FirmsCost structure of a firm under monopolistic competition is similar to that of any other firm (perfectlycompetitive and monopoly firm). The AVC, MC, ATC are all U-shaped implying that there is only singlelevel 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 byChamberlin. The recognition of product differentiation provides the rationale for the selling expensesincurred by the firm. With advertising and other selling activities the firm seeks to differentiate more hisproduct from the products of other firms in the group. Chamberlin assumes that advertising will shift thedemand 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 firmInitially, 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 allproduce same product. But product differentiation creates difficulty in the analytical treatment of theindustry.