Page 42 - Introduction to Business

16 PART 1 The Nature of Contemporary Business

are others who are convinced that “there is nothing between me and my Calvins”
and are willing to pay a high price for a pair of Calvin Klein jeans.
Since product differentiation is such an important part of monopolistic compe-
tition, firms in this industry spend a tremendous amount of money on advertising
to convince the consumer that their product is truly different. Other industry
examples of differentiated products include perfumes, soda pop, toothpaste, deter-
gents, makeup, sneakers, gasoline, and so on. While the utility value of all the prod-
ucts within a category may be about the same, the aura of the specific product
enables the supplier to charge a higher price and reap some monopoly profit.
Exhibit 1.5 summarizes the basics of market structure in a capitalist system. The
degree of competition varies from pure competition with numerous sellers of iden-
tical products, to a large number of sellers of differentiated products, to a system of
few sellers of almost identical products, to the limiting case of a single seller—a
monopolist. Each structure is associated with a particular pricing mechanism,
which is of significant importance to businesses and consumers.
reality
CH ECK Identify a company that is a monopolist in your hometown.

LEARNING OBJECTIVE 5
Discuss the rationale for countries wanting to choose other forms (rather than
capitalism) of economic systems and explain what direction most countries are
moving toward.

EXHIBIT 1.5
Market Structure
Most industries fall in the category of monopolistic competition.

Pure Monopolistic
Competition Competition Oligopoly Monopoly

Where Agricultural Retail trade, Airlines, autos, Utilities, e.g.,
prevalent products, e.g., e.g., fast food, construction cable TV,
corn, rice, wheat gasoline materials, e.g., telephone,
cement, steel electricity

Number of Numerous Many but not Few Single producer
producers as numerous

Product Identical products Perceived Some difference Unique product
differentiation differences in product with no close
in product substitutes

Barriers to None Relatively easy Relatively difficult Regulated by
entry government

Degree of control None Some Some Considerable
over price

Methods of Minimal Heavy advertising Advertise heavily to Advertise service,
market promotion promotion to differentiate promote perceived quality, and
product quality reliability

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