The reason more competition can raise prices

A fourth entrant arrives and within eighteen months all four are spending on packaging, sponsorship and a loyalty programme. Nobody has cut a price. Unit costs are higher than when there were three firms, and so is the shelf price.

What everyone sees

Competition is expected to push prices towards cost, which it does where the product is identical and buyers can compare. Where firms can differentiate, rivalry has another outlet. Spending on distinctiveness is also competition, and it raises cost per unit rather than lowering the price.

What is actually happening

Chamberlin’s model of monopolistic competition shows that where products are differentiated, each firm faces its own downward-sloping demand and competes by moving its product rather than its price, with equilibrium featuring excess capacity and prices above minimum average cost. Sutton’s work on sunk costs and market structure describes the escalation mechanism: where advertising or fixed investment is endogenous, entry can trigger competitive spending that raises industry costs without a corresponding price fall, since the outlays are recovered from buyers. The condition matters. Where buyers can compare identical goods cheaply, entry lowers prices as expected; where differentiation is available, entry can redirect rivalry into cost.

Why it stays hidden

The redirection hides because every element of it looks like consumer benefit. Better packaging, more advertising, more choice and a rewards scheme are all improvements in some dimension, and each is defensible individually. Their combined effect on unit cost is not attributed to competition, because competition is understood to be the thing that lowers prices.