In simple models of competition, rival firms sell a standardized product. This is never the case in the real world. Products or always differentiated in some way, if only by the location of the supplying firm. As differentiation in creases, the products of different producers become poorer substitutes for one another. As differentiation in creases, each producer becomes more and more like a monopolist. This makes competitive industry performance less likely.
But the overall implications of product differentiation are complex. One expects, for example, that an increase in differentiation in the cheese market would increases the power of individual producers to control the prices of their brands of cheese. This is not particularly convincing argument for compelling all cheese manufacturers to produce cheese spread. There is, in other word, a tradeoff between market powers-the power to control price-and variety. Society will usually be welling to put up with some market power in order to get some product variety.
Entry Conditions
The economic analysis of entry conditions focuses on the various factors that influence the decision of a firm to enter a market. How large must a form be to produce efficiently? How large in investment must a firm make to begin operations? If a firm enters a market and fails, how much of its investment can be recovered by selling off assets and how much will be sunk in the market? What sorts of sales efforts, if any, will be needed for a successful operation? How will be established firms react to the prospect of new competition?
On a basic level, entry conditions help explain the number and size distribution of firms that operate in a market. Because entry conditions determine the nature of potential competition between established firms and firms that can enter a market, entry condition affect market performance in their own right, as well as through their effect on market structure.
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