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Monopolistic Competition and Peanut Butter Cookies (GF)

I’m a Peter Pan fan.

Yes, the story is good, but I’m talking about the peanut butter brand Peter Pan. That’s what I grew up eating and that’s what I always pick up when I’m at the store.

Why? Is it better than the other peanut butter brands?

Umm… Sure?

To be honest, I don’t know. I’ve had the others. They seem fine, but when I go to the store I buy Peter Pan. In fact, I was shocked when I found out that a good friend (I won't name names) preferred a different brand of peanut butter – JIF. It blew my mind to realize someone I think is pretty awesome preferred a different brand of peanut butter to me. In other words, I feel some strong brand loyalty towards Peter Pan.

Monopolistically competitive goods are goods that are unique but with close substitutes. I’d say that peanut butter fits that bill. Peter Pan, JIF, Skippy, Smuckers, Peanut Butter & Co. have distinguished themselves as separate brands, although very similar products. After all, it's all just peanut butter!

A few years ago, Peter Pan had a complete recall on peanut butter. All of their peanut butter was pulled off the shelves, and you couldn’t buy it! What did I do? Well, it’s simple, I just shifted over to the other main brands. I didn’t like it, but I did it. In economics terms, that means the demand for JIF, Skippy, etc. increased because of fewer close substitutes. Additionally, the demand for these other brands likely became less elastic. [As a reminder, less elastic means people don't respond as much to changes in prices – for the post on elasticity see go here.] I don’t have the data to show it, but I’ll bet that prices for those peanut butters went up a bit with less competition.

What else do firms do to grab customers’ attention for those without such strong brand loyalty? Well, they advertise! Whether we choose Jif or not, I think we’ve all heard the phrase “choosy Mom’s choose Jif!” If you don’t know what I’m talking about, there are some pretty awesome old-school commercials you can find on the internet like this one. And not surprisingly, you can now hear commercials saying “Choosy moms AND DADS choose Jif.” So, if you head to the grocery store and you’re not like me with precise preferences, you might hear the jingle for Jif in your head and reach out to grab a jar of that brand. Well done, Jif!

One of the key points about goods that are in monopolistically competitive markets is that firms can change different prices without losing all of their customers. [They each have their own demand curve.] Even if Skipppy is 50 cents less than Peter Pan, I’m going to buy Peter Pan. They are different products to me and thus I’m willing to pay more for one over another.

However, they can’t charge as much as in a world with only one peanut butter firm because they do face some competition. That competition lowers their profits.

Peanut butter more broadly has some serious competition now. Almond butter has been increasing in popularity over the last few years. While not an exact substitute to those previously listed peanut butters, it’s pretty close. This too is likely affecting the demand for each of the regular peanut butter brands – decreasing the demand and increasing the elasticity.