![]() Each restaurant has many close substitutes-these may include other restaurants, fast-food outlets, and the deli and frozen-food sections at local supermarkets. Restaurants are a monopolistically competitive sector in most areas there are many firms, each is different, and entry and exit are very easy. Monopolistic competition is a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit. However, because of the availability of close substitutes, the price-setting power of monopolistically competitive firms is quite limited. Product differentiation gives firms producing a particular product some degree of price-setting or monopoly power. ![]() This differentiation may occur by virtue of advertising, convenience of location, product quality, reputation of the seller, or other factors. This model differs from the model of perfect competition in one key respect: it assumes that the goods and services produced by firms are differentiated. ![]() The model of monopolistic competition assumes a large number of firms. ![]() The first model of an imperfectly competitive industry that we shall investigate has conditions quite similar to those of perfect competition.
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