Discuss in the light of Harold Hotelling’s Linear City Model and Richard Schmalensee’s 1978 Paper on breakfast cereals: Many firms in industries face a downward sloping residual demand curve. They engage in monopolistic competition, they have market power and yet they make no economic profit. One of the most important reasons why this is the case is product differentiation. Consumers view the products in an industry as different, as imperfect substitutes. These goods are said to be differentiated or heterogeneous. I f customers view the products in an industry as different then it is possible for a firm to raise it’s price above that of its competitors without losing all its customers. These industries are characterised by monopolistic as opposed to oligopolistic competition and therefore there is free entry and exit.

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