Many businesses operate in the “monopolistically competitive” environment. As we

Question

Many businesses operate in the “monopolistically competitive” environment. As we learned in chapter 13, economic profits are possible in this setting, but only to the extent that a firm can continue to differentiate itself from competing firms or produce goods at a lower cost than competitors. For example, Starbucks recently announced that it plans to offer beer and wine for sale after 4 in the afternoon in some markets. Certainly this differentiates it from other coffee shops.

For this chapter's discussion, please:

1)      Identify a business operating in the monopolistic competition setting.

2)      List the assumptions of monopolistic competition and explain how the business fits in with these assumptions

3)      Suggest a way that this business could differentiate itself from its competition

Explanation / Answer

In the above discussion the Starbucks is operating in a monoolistic competition if he announced that it plans to offer beer and wine for sale after 4 in the afternoon in some markets.

Generally a monopolistic competition:-

Monopolistic Competition refers to a market situation in which there are large numbers of firms which sell closely related but differentiated products. Markets of products like soap, toothpaste AC, etc. are examples of monopolistic competition.

Monopoly + Competition = Monopolistic Competition

Under monopolistic competition, each firm is the sole producer of a particular brand or “product”.

2) Assumption or features of monopolistic competition:-

1. Large Number of Sellers:

There are large numbers of firms selling closely related, but not homogeneous products. Each firm acts independently and has a limited share of the market. So, an individual firm has limited control over the market price. Large number of firms leads to competition in the market.

2. Product Differentiation:

Each firm is in a position to exercise some degree of monopoly (in spite of large number of sellers) through product differentiation. Product differentiation refers to differentiating the products on the basis of brand, size, colour, shape, etc. The product of a firm is close, but not perfect substitute of other firm.

3. Selling costs:

Under monopolistic competition, products are differentiated and these differences are made known to the buyers through selling costs. Selling costs refer to the expenses incurred on marketing, sales promotion and adver­tisement of the product. Such costs are incurred to persuade the buyers to buy a particular brand of the product in preference to competitor’s brand. Due to this reason, selling costs constitute a substantial part of the total cost under monopolistic competition.

4. Freedom of Entry and Exit:

Under monopolistic competition, firms are free to enter into or exit from the industry at any time they wish. It ensures that there are neither abnormal profits nor any abnormal losses to a firm in the long run. However, it must be noted that entry under monopolistic competition is not as easy and free as under perfect competition.

6. Pricing Decision:

A firm under monopolistic competition is neither a price- taker nor a price-maker. However, by producing a unique product or establishing a particular reputation, each firm has partial control over the price. The extent of power to control price depends upon how strongly the buyers are attached to his brand.

etc.. these are the assumptions of monopollistic competition.

3) Suggest a way that this business could differentiate itself from its competition

here, the buiseness can be differentiated if some other things would be offered with these produts or some variation in the prices etcc..

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