Q: The market for laudry detergentis monopolistically competitive. Each firm own

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Q: The market for laudry detergentis monopolistically competitive. Each firm owns one brand, and eachbrand has effectively differentiated itself so that is has somemarket power (i.e., faces a downward sloping demand curve). Still,no brand earns economic profits because entry causes the demand foreach brand to shift in until the seller can just break even. Allfirms have identical cost functions, which areU-shaped.    Suppose that thegovernment does a study on detergents and finds out they are allalike. The public is notified of these findings and suddenlydrops allegiance to any brand. What happens to price whenthis product that was brand-differentiated becomes a commodity?What happens to total sales? What happens to the number of firms inthe market? I have no idea..about this question.can somebody answer this question..? or give me ahint.. Q: The market for laudry detergentis monopolistically competitive. Each firm owns one brand, and eachbrand has effectively differentiated itself so that is has somemarket power (i.e., faces a downward sloping demand curve). Still,no brand earns economic profits because entry causes the demand foreach brand to shift in until the seller can just break even. Allfirms have identical cost functions, which areU-shaped.    Suppose that thegovernment does a study on detergents and finds out they are allalike. The public is notified of these findings and suddenlydrops allegiance to any brand. What happens to price whenthis product that was brand-differentiated becomes a commodity?What happens to total sales? What happens to the number of firms inthe market? I have no idea..about this question.can somebody answer this question..? or give me ahint..

Explanation / Answer

Solution: Based on the information provided, itseems that the initial situation in this market is like thelong-run equilibrium of the monopolistic competition model; seeFigure 6.3. The government's announcement has turned adifferentiated product into a homogeneous one. In terms of thegraph in Figure 6.3, this implies a flattening of the demand curvefaced by each firm and a new long-run equilibrium where d (nowhorizontal) is tangent to the AC curve. At this new long-runequilibrium, price is given by poLR and eachfirm's output is given by qoLR. Clearly, thenew equilibrium implies a lower price and a higher output per firm:poLR qLR. Suppose the pricewere to drop from pLR to poLRwithout changing the degree of product differentiation or thenumber of firms. This would imply an output per firm equal toqoSR , where qoSR isgreater than qLR but lower thanqoLR . If we take into account thedisappearance of product differentiation (and continue with thesame number of firms), then the output per firm would be less thanqoSR. Whatever the exact value is, each firmwould be losing money (poLR

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