Competitive Industries
That is, practice product differentiation – it can increase its ability to raise prices (within limits) without losing too many sales.
For instance, Harry’s Hamburg Stand is a firm in a monopolistically competitive industry (fast foods) comprised of a large number of small outlets, each with its own characteristics such as product, service and location. Harry’s Hamburg Stand is differentiated by its location (between the beer store and the drive-in theater), its product (Harry’s hamburger are not prepackaged, but charbroiled and dressed to the customer’s taste), its service (Harry’s employees are known to be very polite and efficient), and the fact that Harry was the highly popular penalty leader for the local hockey team for several years. At a price of $1 per hamburger (the same price charged by most others in the area), Harry sells 2000 hamburgers per week, as indicated by the dot on the diagram. The demand curve is quite elastic, due to the competitiveness of the industry, but around the market price of $1, it is less elastic, due to the fact that Harry’s is differentiated from his competitors. For instance, Harry could raise his price a little (say, to $1.10) without losing many sales. While some of his customers would abandon him, the vast majority would stay him. Although not happy about paying the premium, they would feel that the combination of location, product and service made Harry’s hamburgers worth a little more. Thus, for a small price increase, the demand for Harry to raise his price a little. However, if Harry were to raise this price by much (say to $1.20), he would likely find that the demand for his burgers are not worth the extra $.20 each and switch to other hamburg stands, causing Harry’s sales (and profits) to try or not. As we have said, perfect competition is a rare situation because of the requirement that products be identical; however, monopolistic competition is a very common form of market structure that includes most of the small business sector of the economy discussed earlier. Taken together, competitive industries probably account for roughly two-fifths of the economy’s output, concentrated for the most part in some sectors of agriculture and fishing, retail trade, small-scale manufacturing and especially the large number of service industries (restaurants, fast-food outlets, travel agencies, and so on) that have expanded rapidly in recent years. Figure 9-5 summarizes the characteristics of the two types of competitive industries we have been considering, together with the incentives that each situation provides to producers. For comparative purposes, a brief summary of non competitive industries, which will be examined in Chapter 10, is also included.
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