"If the amount of product differentiation in a monopolistically competitive industry is very small, the outcome in that market will not be very different than if it were a perfectly competitive industry." Explain.
What will be an ideal response?
If the amount of product differentiation is very small then the good produced by any individual firm is a very close substitute for that produced by any other firm. That means that consumers will pay only a slightly higher price for their favorite good, as opposed to a large increase in price if the goods were very different. This means that all firms' prices will be virtually the same. This is a very similar situation to perfect competition where all firms' prices are exactly the same.
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