In monop. competition,Why is is that the greater product differentiation, the greater the excess capacity?

Question

Can anyone explain this graphically? I am looking at my monopolistic competition graph, and i dont understand how the greater the product differentiaion increases exces capacity. I mean, greater product differentiation means an increase in demand in MR(correct me if im wrong). With this shift in the demand and MR curve, how does that increase the distance from the quantity the firm produces at, and the min. ATC point?

Answer 1

Forget the graphs. They apply only to an absolutely perfect monopoly. The question deals more with reality.

Suppose you only had one broadband provider in your neighborhood. It is a monopoly. But its behavior is still affected by whether people could have slow speed dial-up service or medium sped ISDN.

The less product differentiation, the less monopoly power.

If you insist on graphs, product differentiation affects the slope of the MR curve, not the point along a constant demand curve at which the company operates.

Answer 2

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