1. “Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point.” Explain
2. “Competition in quality and service may be just as effective as price competition in giving buyers more for their money.” Do you agree? Why? Explain why monopolistically competitive firms frequently prefer non-price competition to price competition.
3. Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership is legal in the United States, whereas price fixing is not.
1. Certain products for which there are very few substitutes would give rise to monopolistic competition. This is because there are no other products of the same type available from the few companies that manufacture those, so these companies can behave monopolistically and set the price, supply etc. arbitrarily. For example, HP, Dell, and Compaq produce very high quality laptops that are not available through any other firm. So for these products, these firms can be called monopolistically competitive. On the other hand, for the …
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