8.4. Monopolistic Competition: Many Unique Products

Most businesses work hard to make their products and services special or unique. When many firms are selling similar products and services, they work hard to explain how they are "new and improved," "used by professionals," or "the best value for the lowest price." When the products in a market are different, or are thought to be different, it is no longer perfectly competitive.

The process of creating uniqueness in products is known as product differentiation. Product differ­entiation, when it is successful, enables a firm to create product loyalty so its customers prefer its products over the competition's. What are some ways businesses try to differentiate their products?

Mary Lou and Hot Dog Harry operate sidewalk stands near one another. At lunchtime both Mary and Harry do a brisk business, and they both have their steady customers. Ask Mary's regulars why they prefer her hot dogs and they might tell you that they think her sauerkraut is special or that they think she is courteous. Harry's customers are equally enthusiastic about his "dogs" and special sauce. Harry charges $.90 for his hot dogs. Mary Lou charges $.95. Another stand a few blocks away sells hot dogs for $.85, but that stand is not as successful as Mary Lou's or Harry's.

Although Mary Lou and Hot Dog Harry sell similar products, they are not the same in the minds of those who prefer one over the other. Through a spe­cial sauerkraut recipe or special sauce, Mary Lou and Harry differentiate their product to increase demand. What are some other ways businesses use product differentiation to attract customers?

• Customer services. Suppose you approach four gas stations at the same intersection. Each charges the same price for gasoline of similar quality. Why would you choose one station over another? Perhaps one provides a car wash with each fill-up, while another checks your oil and washes your windshield. The third might accept more credit cards. "Free estimates," "free deliv­ery," and "a drive-in window" are all examples of special services businesses provide to attract your business. Although stock market trading is closest to per­fect competition, even stockbrokers provide an example of monopolistic competition in a service industry. Stockbrokers will not claim that the stocks they buy or sell for you are any different from the shares that anyone else buys or sells. But stockbrokers do compete with one another for the public's business. They try to make their ser­vices more attractive than the competition's so potential customers will think of them the next time they want to invest.

• Prestige. Many businesses use highly visible labels to differentiate their products. Did you ever buy a shirt because it had an alligator or polo pony on it? Many companies work hard to develop an image of high quality. People who purchase a Mercedes, Cadillac, or Lexus are interested in more than simple transportation to and from the grocery store.

• Warranties and support. People who buy com­puter software often buy from a company that provides the best technical support, but even toothpaste tubes come with a "1-800" phone number to call with questions about the prod­uct. Often a guarantee or warranty will convince you to buy one product rather than another. And the reputa­tion of a car dealer's service department can influ­ence the type of car you buy.

Many products are sold in markets described as monopolistic competition, but an industry dominat­ed by a few large firms is called an oligopoly.