On the previous page, the word "industry" was put in quotes, when it referred to a group of firms with product differentiation. That's because the boundaries of the industry become much more vague when we talk about product differentiation. A hairdresser in Center City Philadelphia and another in a Philadelphia suburb may be pretty close substitutes -- but the Philadelphia hairdresser's service will be a very poor substitute for the services of a hairdresser in Seattle! Are they in the same industry? Or should we think of hairdressing industries as localized, so that Philadelphia hairdressing is a different industry than Seattle hairdressing? And, too: barbers may cut women's hair, and hairdressers may cut men's hair. Are hairdressers and barbers part of the same industry, or different industries? There really is no final answer to this question, and some economists have avoided any reference to industries in dealing with monopolistic competition. Instead they talk about "product groups." A product group is a group of firms selling products that are "good," but not necessarily "perfect" substitutes. And, of course, a product group is not unique, since it depends on how "good" we require the substitutes to be, so there will be broader and narrower product groups. Coke and Pepsi are both members of the product group "cola drinks," while Coke, Dr. Pepper, Sprite and Squirt are members of the broader product group "carbonated soft drinks."
This illustrates another point. Product differentiation is characteristic of monopolistic competition, but not limited to monopolistic competition. Oligopolies, too, may have product differentiation. Cola drinks would probably be thought of as a differentiated oligopoly, an oligopoly product group, rather than a monopolistically competitive group.
And what about "free entry?" For monopolistic competition, that means free entry into the "product group." Again, let's think of hairdressers as the example. If a hairdresser is especially successful with a Seattle-punk style at a certain location in Center City Philadelphia, there is nothing to prevent other hairdressers from setting up at a nearby location, and cutting in a similar style. In that sense, there is "free entry" into the product group. In general, when one monopolistically competitive firm is quite profitable, we may expect that other firms will set up in business producing similar products, and established firms may change the characteristics of the products they produce, to make those products more similar to the successful one. In that sense, there is free entry into the monopolistically competitive product group.
