individual firms that produce more-or-less identical products and are
price takers. Forest and fish products, agricultural products, and
commodities such as iron ore, tin, and copper are sold in markets where
most individual firms do not possess market power. Many other Canadian
industries, however, contain many small firms but are not well described
by the perfectly competitive model.
The theory of monopolistic competition was originally developed to help
explain economic behaviour and outcomes in industries in which there
are many small firms, but where each firm has some degree of market
power. Consider your local hair salon, car mechanic, or neighbourhood
pub, each of which has some ability to influence the prices of their
products. They probably spend some money on advertising, which they
would not do if they were price takers. Nor are these firms selling
identical products. A hair salon can easily distinguish itself from its
competitors, as can a neighbourhood pub. Even the car mechanic can
offer different levels of service and speed to differentiate its product. Each
of these firms also differentiates itself simply by being in a different
location, which itself gives it some degree of market power, unlike a
perfectly competitive firm.
Industries with a Few Large Firms
About one-third of Canada’s total output is produced in industries
dominated by either a single firm or a few large ones. As we saw in
Chapter 10 , cases of pure monopoly in Canada are rare, and the
provincial hydro-electric utilities are the most striking example of an