The shop on the corner sells something the shop across town cannot quite supply: the same good, here. A familiar maker sells a quality the buyer expects without testing again; a café sells a seat, a route home and a habit along with the coffee. These differences can leave a seller room to raise his price without losing every customer. They also give customers reasons to choose among sellers in the first place. The problem is therefore deeper than a defect in the resemblance of goods. A market may compete through differences that give its participants a measure of power over price.
A difference matters economically when it changes substitution. Two physically distinct objects may serve the buyer’s purpose equally well; two identical objects at different locations may not. Lerner pressed this point in his discussion of monopoly measurement: the definition of the commodity becomes unstable if physical identity is asked to do the work of an account of alternatives. What matters to a seller is how much demand he loses when his offer worsens. That response can be steep enough to discipline him severely without being infinite. His product need not be indispensable. Some buyers need only prefer it enough to remain when the price rises a little.
The theory of monopolistic competition gives this middle position a structure. Many sellers offer differentiated products; each faces a downward-sloping demand for its own variety; entry can draw customers away from the firms already present. The local price decision has a monopolistic element, while the ability of another seller to establish an alternative supplies a competitive discipline. Chamberlin’s name for the arrangement preserves both parts. Robinson’s contemporaneous treatment of imperfect competition helped overturn the presumption that the competitive price-taker was the only ordinary firm worth studying. The shared change in perspective did not make their analyses identical, and neither licenses a count of market power from the mere number of brands.
A simple invented variety makes the coexistence legible. Suppose its demand elasticity is four in absolute value: around the chosen price, a one-percent increase in price reduces demand by about four percent. If the marginal cost of producing another unit is six, the single-product profit condition gives a price of eight. Two of the eight dollars stand above marginal cost. Yet the firm may earn no economic profit. If it sells one hundred units and must pay two hundred in fixed costs to offer the variety at all, the entire contribution from sales goes to those costs. Price exceeds marginal cost; receipts just cover the full economic cost of the enterprise. The two statements are compatible because they answer different questions.
Entry can eliminate the profit without eliminating the markup. When another variety becomes available, some expenditure moves to it. In the symmetric constant-elasticity model, entry reduces each incumbent’s sales until the contribution above variable cost just pays the fixed charge. The elasticity that governs the price can remain unchanged. Firms are disciplined by the arrival of alternatives, but the discipline acts on their customer base rather than forcing the price down to the cost of the next unit. A census of comfortable margins can therefore coexist with a population of businesses that cannot afford to charge less and still remain open.
The fixed cost makes variety a real choice about resources. One establishment producing more can spread its setup cost across a larger output. Several establishments can offer differences that buyers value. Concentrating all production in one variety saves some duplication while sacrificing that diversity; multiplying varieties supplies more choice while using resources to establish each one. The smaller scale of an individual firm is not enough to decide which side has gone too far. A spare seat at one café might be evidence of wasted capacity, or part of the cost of having a café near two different groups of customers. The welfare question must count the value of the alternative as well as the expense of providing it.
Dixit and Stiglitz made the ambiguity a result rather than an apology. In their symmetric constant-elasticity case, the market equilibrium coincides with the optimum subject to each firm covering its costs without lump-sum subsidies. Remove that financing restriction and the first-best arrangement has more varieties, with the same output per variety. Once they relax the special demand assumptions, the market’s bias can go in either direction. The lesson is demanding: a positive markup does not by itself establish too much variety, and free entry does not by itself establish the right variety. The costs and benefits that entry creates for buyers and rival producers must be brought into the same comparison.
Brand and habit can enter that comparison in more than one way. A recognizable name may reduce the cost of discovering whether a good will do what is promised. A distinctive design may fit a use that a standardized design serves badly. Expenditure that merely shifts attention between otherwise equivalent offers has a different claim on resources. So does a contractual obstacle that makes an existing customer pay to leave. The outward fact of a customer remaining with one seller cannot tell these mechanisms apart. The value of assurance, the value of a feature, the influence of persuasion and the cost of exit all have to be specified before loyalty can be given an economic interpretation.
Entry can exhaust a profit while leaving a markup.
A seller’s private return from a difference need not equal its benefit to buyers. The seller captures what the difference allows him to charge or sell. A buyer may receive additional value that never appears in the seller’s revenue, while an entrant may draw business from another firm rather than create an equally large new gain for the market. Dixit and Stiglitz’s asymmetric cases show that even the selection of which products are offered can diverge from a constrained optimum. Their general point is that revenue rewards only part of what a new product contributes. A shelf of competing varieties therefore requires analysis of what is offered and what remains absent, as well as of the prices attached to what is there.
The little power in a difference can be contested, and the contest need not erase the difference. A rival may offer a better location, a more reliable product, a simpler way to leave, or a price low enough to compensate for what its offering lacks. Competition then works by changing the alternatives against which a customer chooses. Where those alternatives remain easy to establish and use, discretion may be narrow and temporary. Where access to customers, essential inputs or switching is obstructed, the same outward diversity can shelter much more durable power. That is where the next plate begins. The difference gives a seller a reason to be chosen; the barrier determines how readily someone else can earn a place beside him.