10.6 The Benefits of Variety and Product Differentiation

Even though monopolistic competition does not provide efficiency, it does have benefits of its own. Product differentiation is based on variety and innovation. Many people would prefer to live in an economy with many kinds of clothes, foods, and car styles; not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car. Many people would prefer to live in an economy where firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.

Economists have struggled, with only partial success, to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue that society does not really need dozens of different athletic shoes or breakfast cereals or automobiles. They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price.

Defenders of a market-oriented economy respond that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so. Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products. This controversy may never be fully resolved, in part because deciding on the optimal amount of variety is very difficult, and in part because the two sides often place different values on what variety means for consumers.

The following table summarizes the three types of market structure we have examined.

Market Type Description MR vs P P vs MC LR Profit LR ATC DWL
Perfect Competition Many sellers, identical goods, free entry in LR MR=P P=MC Profits are zero ATCLR=ATCMIN No
Monopoly Single seller, barriers to entry MR<P P>MC Positive profits ATCLR>ATCMIN Yes
Monopolistic Competition Many sellers, differentiated products, free entry in LR MR<P P>MC Profits are zero ATCLR>ATCMIN Yes


8.4 Monopolistic Competition” in Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.


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Principles of Microeconomics Copyright © 2022 by Sharmistha Nag is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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