"Name That Butt!" Product Differentiation in Monopolistic Competition

Document created by Eric Chiang on Jun 25, 2015Last modified by Eric Chiang on Jun 25, 2015
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The most important characteristic of monopolistic competition is product differentiation. But students sometimes find it difficult to relate how product differentiation translates into potentially widely varying prices.

 

The example I use in class is the market for blue jeans. There are hundreds of brands, ranging from the least costly brands (Old Navy, H&M, Wrangler) that cost $20-$40 to the most expensive brands (True Religion, Diesel) that cost $200 and up. And one can find nearly all of these brands in a typical large mall.

 

Part 1: Have the class discuss the features that differentiate one brand from another. Students typically have no problem talking about the style, fit, feel, logo, etc.

 

Part 2: Search on the Internet for images of different brands of blue jeans (focusing on the back where most features appear such as the pocket design and logo). Show each image one at a time and have the class guess which brand of jeans they are. The point of this exercise is that if a consumer truly values expensive jeans, then that consumer should in theory be able to easily tell the difference between cheap and expensive jeans. Surprisingly, many cannot. For example, I find that many students cannot tell the difference (by sight alone) when someone is wearing a $30 H&M jeans versus a $200 pair of Diesel jeans.

 

Part 3: After the guessing game, discuss with the class how the expensive brands are able to distinguish themselves and to generate a steeper demand curve that allows them to charge higher prices, while less expensive brands tend to have more competition since consumers are more willing to try different brands.

This activity takes 10 to 15 minutes of class time, and is a fun way to introduce monopolistic competition before proceeding to the graphical analysis.

 

One final note: in Part 2, include a pair of Guess jeans in the mix, and when you show it, tell the class "Now I want you to take a good guess what brand this is." "Seriously, I want you to GUESS what brand it is!." It's funny how almost no one catches the hint until after you reveal the brand name.

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