Exercises · Q9
Q.Explain why the demand curve facing a firm under monopolistic competition is negatively sloped.
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Start your 14-day free trial to unlock the full solution →Product differentiation gives each firm partial market power: it loses only some customers when it raises price and gains some when it lowers price, so it sells more only at a lower price — a negatively sloped demand curve.
Under monopolistic competition there are many firms, but each sells a differentiated product — distinguished by brand name, packaging, taste or some other feature. Consumers develop a preference or loyalty for particular brands and will not instantly switch away for a small price difference.
Because of this brand attachment:
- if a firm raises its price a little, it does not lose all its customers (as a perfectly competitive firm would) — the loyal ones stay; and
- if it lowers its price, it attracts some customers away from rival brands, and lowering the price further attracts still more. …
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