rural areas unable to receive multiple network broadcasts face higher cable
prices.) Evidence from the long-distance telephone market, where Verizon,
Sprint, the Baby Bells, and independent companies compete successfully with
AT&T, also underscores the price-lowering benefits of increased competition.
Likewise, in the cellular market, intense competition by the same players and
others has lowered prices dramatically. (Since 2003, allowing number porta-
bility when switching providers has had an additional price-lowering effect.)
By comparison, local telephone competition has been somewhat disappointing.
Prices to consumers have fallen, mainly due to regulations requiring the local
network owner to provide access to competitor firms at low fees. Thus, lower
retail prices have stemmed from lower regulated retail prices rather than from
new network capacity.
In short, many economists advocate a “hands-off” regulatory approach to
allow the process of free entry and competition to uncover the most efficient
ways of providing telecommunications services.MONOPOLISTIC COMPETITION
In perfect competition, all firms supply an identical standardized product. In
monopoly, a single firm sells a unique product (albeit one that may have indi-
rect substitutes). As the term suggests, monopolistic competitionrepresents a
mixture of these two cases. The main feature of monopolistic competition is
product differentiation:Firms compete by selling products that differ slightly from
one another. Product differentiation occurs to a greater or lesser degree in most
consumer markets. Firms sell goods with different attributes (claimed to be
superior to those of competitors). They also deliver varying levels of support
and service to customers. Advertising and marketing, aimed at creating product
or brand-name allegiance, reinforce (real or perceived) product differences.
Product differentiation means that competing firms have some control
over price. Because competing products are close substitutes, demand is rela-
tively elastic, but not perfectly elastic as in perfect competition. The firm has
some discretion in raising price without losing its entire market to competi-
tors. Conversely, lowering price will induce additional (but not unlimited) sales.
In analyzing monopolistic competition, one often speaks of product groups.
These are collections of similar products produced by competing firms. For
instance, “designer dresses” would be a typical product group, within which
there are significant perceived differences among competitors.
The determination of appropriate product groups always should be made
on the basis of substitutability and relative price effects. Many, if not most, retail
stores operate under monopolistic competition. Consider competition among
supermarkets. Besides differences in store size, types of products stocked, and
service, these stores are distinguished by locational convenience—arguably the
most important factor. Owing to locational convenience and other service336 Chapter 8 Monopolyc08Monopoly.qxd 9/29/11 1:31 PM Page 336