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October 19, 2020 

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ALLOCATION EFFECT: The goal of imposing taxes to change the allocation of resources, that is, to discourage the production, consumption, or exchange or one type of good usually in favor of another. This is one of two reasons that governments impose taxes. The other reason is the revenue effect. Because people would rather not pay taxes, taxes create disincentives to produce, consume, and exchange. If society deems that less of a particular good, such as alcohol, pollution, or cigarettes are "bad," then a tax can reduce its production and consumption, and thus change the allocation of resources.

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PRINCIPLE OF MINIMUM DIFFERENCES:

A principle stating that monopolistically competitive firms seek to maintain similarities between products at the same time they promote differences. Similarities enable substitutability, such that one firm can attract the buyers away from other firms. Differences enable uniqueness and market control, such that each firm has market control and is able to charge a higher price than achieved with perfect competition. This principle is also termed Hotelling's paradox.
The principle of minimum differences is a guiding feature of monopolistic competition. It is based on the notion that monopolistically competitive firms seek product differentiation, just not too much. Product differentiation provides a firm with market control and the ability to charge a higher price for its product than it might otherwise. However, minimizing product differences maintains substitutability with competitive products.

Consider how this principle works for the monopolistically competitive restaurant market in Shady Valley. Manny Mustard's House of Sandwich is one participating firm. Manny's specialty, the Deluxe Club Sandwich, offers a prime example of this principle.

  • First, Manny must make sure that his product is similar to other products. At the very least, being that he is operating in the restaurant industry, his Deluxe Club Sandwich must be a food product. Should Manny replace his bread, lettuce, tomatoes, and meat, with cardboard, plastic, aluminum, and barbed wire, then he cannot compete effectively for food-hungry buyers. If Manny hopes to attract a lunch crowd, then he must sell food.

    Taking this a step farther, if Manny hopes to compete with other establishments selling club sandwiches, then his club sandwich must be similar to their club sandwiches. If they use ham, turkey, and bacon, then he needs to use ham, turkey, and bacon. If he leaves off the bacon, then he does not have a club sandwich, he has a ham and turkey sandwich.


  • Second, within the specifics of this product type, Manny can seek differences from the competition. This is why Manny makes his Deluxe Club Sandwich with barbecue sauce rather than mayonnaise. He could also use leaner, fat free, cuts of ham and turkey. Perhaps he could use homemade bread. Maybe he could chop his bacon rather than using strips.

    The key, of course, is that Manny seeks to make his Deluxe Club Sandwich a little different from the hundreds of other club sandwiches available in the market. The uniqueness of Manny's Deluxe Club Sandwich is what gives him a teeny, tiny monopoly-slice of the overall market. This is what allows him to charge a slightly higher price than that paid for a generic, run-of-the-mill, nothing-special-about-it, club sandwich.

The ongoing challenge for monopolistically competitive firms is to balance the differences and the similarities. Too many similarities and a firm loses its customers to the competition. Too many differences and it loses its customers to the competition.

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Recommended Citation:

PRINCIPLE OF MINIMUM DIFFERENCES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: October 19, 2020].


Check Out These Related Terms...

     | monopolistic competition, advertising | product differentiation |


Or For A Little Background...

     | production | satisfaction | monopolistic competition | monopolistic competition, characteristics | monopolistic competition, efficiency | perfect competition | perfect competition, characteristics | perfect competition, efficiency | market control |


And For Further Study...

     | competition among the many | market structures | third rule of subjectivity | monopolistic competition, short-run production analysis | perfect competition, short-run production analysis |


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