Monopolistic Competition - QuestionWatch
I have a question and hope you can help me. I was taught the following formula for monopolistic competition:
Q = S * [1/n - b*(P - P^)]
where Q is the number of products sold by our company, S the number of products sold by the whole industry, n the number of competitors, P the price our company chooses and P^ the average price of the industry.
How much we sell thus depends on how many competitors we have and on how big the difference is between our price and that of our competitors.
But what about the factor "b"? Does it represent other aspects influencing our sales like special product features, quality and marketing?
If so, the factor should vary from company to company (depending on their marketing campaigns and the quality of their products).
However, according to my book, the factor "b" is the same for every company in the monopolistic competition...
Can somebody explain to me why this is?
What is the factor "b" and how are differences in quality and marketing of the products accounted for?
(After all this is not perfect competition where all goods are assumed to be homogenous. This model is supposed to account for heterogenous goods.)
Thx in advance for your help!
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