Product differentiation helps explain the slope of the demand curve facing a firm in monopolistic competition.

Question

Quizplus · Accepted Answer

Product differentiation is one of the key features of monopolistic competition. When firms offer differentiated products, each firm has some market power and faces a downward sloping demand curve. The extent to which the demand curve slopes downwards depends on the degree of differentiation of the product offered by the firm. The more differentiated the product, the steeper the demand curve facing the firm. Therefore, product differentiation helps explain the slope of the demand curve facing a firm in monopolistic competition.

Product Differentiation Helps Explain the Slope of the Demand Curve