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Product Variety
- Each firm has a product that is distinguishable in some way from those of the other producers. Therefore, firms are able to have profit from differentiation.In the long run, monopolistic competitive markets will only earn a normal profit due to easy entry and exit of the industry.
- But, by differentiating a product, the firm can at least for some period gain some economic profits, since there won't be an exact substitute
- Product variety and advertising may increase the firm's cost for a while but it can also increase consumer's demands
- If the demand curve shifts out enough to cover up its costs (or even exceed it), the company will obtain economic profits
Benefits of Product Variety:
- Satisfies a wide range of consumer tastes.
- Successful product improvement by one firm encourages other firms to also improve or imitate.
Further Complexity
- Situation of a monopolistic competitor is complex due to its ability to engage in nonprice competition.
- Three factors in seeking maximum profit: price, product, advertising.
- What variety of product
- Selling at what price
- What level of adversiting will result in greatest profit
- This complex situation is not expressed in a single simple economic model.
- An optimal combination that yields maximum profit can only be found by trial and error.
- Models help evaluate efficiency of an economy.
anqxl |
Latest page update: made by anqxl
, Dec 7 2007, 8:36 PM EST
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