Chapter 14: Monopolistic Competition and Product Differentiation
1. Emphasize to students that monopolistic competition involves large numbers of substitutes, where no
one individual rival is likely to take a large number of sales away, because that is why it is not dominated
2. Catalog shopping and internet shopping may be good monopolistic competition model illustrations,
because of the ease of entry involved (since anyone can relatively easily send out a catalog or set up a
4. One good illustration of a currently popular way for a firm to differentiate its products is by giving some
(which give 10% of their profits to charity).
5. In talking about location as a form of differentiation, note that if transportation (distance) is very costly,
location may imply that there are only a very few relevant sellers close by, and oligopoly interdependence
may replace monopolistic competition as the relevant model.
6. Remind students that the monopolistic competition model is basically the short run monopoly model in
terms of its mechanics (although firms face higher elasticities of demand because of a large number of
7. Make sure students see why, as with the monopoly model, marginal revenue diverges farther from
linear demand curve as the price falls (the further one moves down along the demand curve, the more
9. Introduce the shorthand marginal revenue drawing rule–marginal revenue is halfway from the vertical
axis to the demand curve at any price, for a linear demand curve-–
models tools for themselves.
10. I
profits equal total revenue minus total cost, then showing that since average revenue, or price, equals
11. To emphasize to potential explanatory reach of the monopolistic competition model to students, you
12. It is important to emphasize to students that monopolistic competition does not literally require zero
profits for all firms (without additional assumptions); it only must be true of the expectations (in present
value terms, not just current profits) of marginal potential entrants (though to the extent that interfirm
13. Another way to think of monopolistic competition is to think of it as a search for mutually beneficial
characteristics of products in a world of uncertainty, not primarily as a comparative static model.
14. Reiterate that the monopolistic competition zero profit tangency solution is the source of the excess
15. You may want to show students how many excess capacity examples can be understood as means
of lowering search costs or other costs even more. For instance, as Armen Alchian demonstrated,
16. Note tha
to zero, there may be less excess capacity in the real world than the illustration in the chapter indicates.
17. Note to students that if a new product is created that attracts strong consumer preferences (so that its
18. Note that it is not differentiation that firms are looking for, but forms of differentiation that consumers
are willing to pay enough more for to make profitable.
19. Note that the search for successful product differentiation–intended to increase firm demand and
make it more inelastic–is often the search for unique advertising or promotions. A better (more
20. In judging how inefficient monopolistic competition is, it is worth reminding students that producers