Give an example that shows how inefficiency relates to product differentiation for a monopolistically competitive industry.
What will be an ideal response?
Examples will vary, but should show a thorough understanding of how inefficiency relates to product differentiation for a monopolistically competitive industry. Let’s take the pizza restaurant industry as an example. A town has three pizza restaurants that are chains. It also has two local pizza places. The town has an average capacity of ordering 5,000 pizzas a week. However, if the production capacity of all five restaurants is totaled, it would come to 8,000 pizzas a week. As a result, each restaurant has excess capacity. They are able to produce more than they sell. Although this situation is inefficient, it provides the town residents with differentiated products. The pizzas for each restaurant are somewhat different. One restaurant, for instance, provides pineapple pizza while the others don’t. Another restaurant is unique in using only organic ingredients. So inefficiency is the price paid for product differentiation.
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