What is true for cars and TVs is true for virtually all consumer goods. Any
one manufacturer will typically have several product lines that differ from
each other and from the competing product lines of other firms. Each
product has a price that must be set by its producer.
Firms that choose their prices are said to be price setters. Each firm has
expectations about the quantity it can sell at each price that it might set.
Unexpected demand fluctuations then cause unexpected variations in the
quantities sold at these prices.
In imperfect competition, most firms set their prices and then let demand determine sales.
Changes in market conditions are signalled to the firm by changes in the firm’s sales.One striking contrast between perfectly competitive markets and markets
for differentiated products concerns the behaviour of prices. In perfect
competition, prices change continually in response to changes in demand
and supply. In markets where differentiated products are sold, prices
change less frequently.
Firms that sell differentiated products typically have many distinct
products on their price lists. Changing such a long list of prices is often
costly enough that it is done only infrequently. The costs of changing the
prices include the costs of printing new list prices and notifying all
customers, the difficulty of keeping track of frequently changing prices for
accounting purposes, and the loss of customer and retailer goodwill
caused by frequent price changes. As a result, imperfectly competitive
firms often respond to fluctuations in demand by changing output and