\"Competition in quality and service may be just as affective as price competiti
ID: 1248709 • Letter: #
Question
"Competition in quality and service may be just as affective as price competition in given buyers more for their money." Do you agree? Why? Explaine why monopolistically competitive firms frequently perfer nonprice competition to price competition.How does monopolistic competition differ from pure competition in its basic characteristics? How does it differ from pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor snd how that, in turn, affects its economic profit.
Explanation / Answer
"Competition in quality and service may be just as affective as price competition in given buyers more for their money." Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice competition to price competition.
Monopolistic market structure has many firms selling similar but not identical products.
They show minor differentiation in their products with respect to quality and service levels.
A monopolistic firm earns abnormal profits, by charging a price higher than the marginal cost incurred for producing the product. So, if it decides to reduce price, other firms should also follow the same suit, fearing a loss in market share this eventually lead to a price war, reducing profit margins of the entire market.
Instead of price cuts firms try to maximize their market share by showing minor differentiation with respect to quality, services and also through celebrity endorsement.
How does monopolistic competition differ from pure competition in its basic characteristics? How does it differ from pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor snd how that, in turn, affects its economic profit.
Monopolistic market structure has many firms selling similar but not identical products, where as a competitive market structure has many sellers producing identical or homogenous products.
A monopoly is characterized by a single firm producing unique product, or no other firm has the capability or accesses to produce.
Ex: patented drugs, companies holding key input or resource for production.
Product differentiation is the degree of variation in the product offering. It gives a competitive advantage to a firm.
The major sources of product differentiation are as follows.
A monopoly produces a unique product with perfect differentiation.
A monopolist produces a product with minor differentiation.
A perfect competitive market produces a homogenous product without any differentiation.
Entry of new firms into the market makes the demand curve more elastic, and competitive. Increased competition obliges the firm to sell their product at a price equal to marginal costs reducing their profits.
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