Product Differentiation and Demand Elasticity
This paper argues that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Despite Chamberlin’s view, monopolistic competitors are price takers, even though each firm’s product has no perfect substitute. There is a difference between perfect competition with product homogeneity and perfect competition with differentiated products, however. Advertising can pay off with differentiated products because products have separate identities—and price depends on quality—even though firms are price takers for any given quality. A differentiated oligopoly may resemble monopolistic competition a la Chamberlin in some ways.
|Keywords||Monopolistic Competition, Perfect Competition, Product Differentiation|
|JEL||Perfect Competition (jel D41), Oligopoly and Other Forms of Market Imperfection (jel D43)|
|Publisher||Department of Economics|
|Series||Carleton Economics Working Papers (CEWP)|
Carson, R. L. (2018). Product Differentiation and Demand Elasticity (No. CEP 18-12). Carleton Economics Working Papers (CEWP). Department of Economics.