The reason that slightly higher prices will be necessary is that in order to support variation in product supplied, sellers may no longer be able to operate at the same minimum efficient scale that was possible when there was one version of the good that every seller produced in a manner that was indistinguishable from the good of other sellers. Variation in the product by sellers will only make sense if consumers are responsive to these differences and are willing to pay a slightly higher price for the variation they prefer. Some firms may make the cars more reliable or built to last longer. Some firms may sell cars that are a different color or different shape, have different configurations of onboard electronics like GPS systems, and so on. This means that while all sellers in the market sell a similar good that serves the same basic need of the consumer, some sellers can make slight variations in their version of the good sold in the market.Īs an example, consider midsized passenger automobiles. which uses the same assumptions as the perfect competition model with one difference: The good sold may be heterogeneous.
model, The monopolistic competition model is discussed in Samuelson and Marks (2010). The first is the oddly named monopolistic competition A model of a market that is similar to perfect competition but in which the good sold may have slight variations from seller to seller.
Next we will consider some slight variations on the perfect competition model.
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