Question

The market for laundry detergent is monopolistically competitive. Each firm owns one brand, and each brand has effectively differentiated itself so that it has some market power. Still no brand earns economic profits because entry occurs so that the demand for each brand shifts in until the seller can just break even. All firms have identical average cost functions which are U-shaped.

a. Draw a diagram of a representative firm in this industry in a LR equilibrium.

b. Suppose that Consumer Reports does a study on laundry detergent and finds out they are all functionally identical. Consumers that are aware of this report no longer have an allegiance to any particular brand. What do you expect will happen in the market when detergent is no longer differentiated in the eyes of “some” consumers?

Answer 1