Effect of Product Differentiation on Competition

In addition to the number and size distribution of actual and potential competitors, market structure is also described by the degree of product differentiation. Product differentiation includes any real or perceived differences in the quality of goods and services offered to consumers. Sources of product differentiation include all of the various forms of advertising promotion, plus new products and processes made possible by effective programs of research and development.

The availability and cost of information about prices and output quality is a similarly important determinant of market structure. Competition is always most vigorous when buyers and sellers have ready access to detailed price/performance information.

Finally, market structure is broadly determined by entry and exit conditions. Low regulatory barriers, modest capital requirements, and nominal standards for skilled labor and other inputs all increase the likelihood that competition will be vigorous. Because all of these elements of market structure have important consequences for the price/output decisions made by firms, the study of market structure is an important ingredient of managerial economics f^^ERFECTÇOMPETITION

Market characteristics described in the preceding section determine the level of competition in the market for any good or service. This section focuses on the special features of perfectly competitive markets and illustrates why perfect competition is desirable from a social perspective.

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