Refer to text 'Monopolistic Competition in the Markets for Colas and Coffee'. on the image insertedBriefly explain any two observations regarding the differences in the price elasticities for colas and ground coffee. Monopolistic Competition in the Markets for Colasand CoffeeThe markets for soft drinks and coffee illustrate the characteristics of monopolisticcompetition. Each market has a variety of brands that differ slightly but are closesubstitutes for one another. Each brand of cola, for example, tastes a little differentfrom the next. (Can you tell the difference between Coke and Pepsi? Between Coke andRC Cola?) And each brand of ground coffee has a slightly different flavor, fragrance, andcaffeine content. Most consumers develop their own preferences; you might preferMaxwell House coffee to other brands and buy it regularly. Brand loyalties, however, areusually limited. If the price of Maxwell House were to rise substantially above those ofother brands, you and most other consumers who had been buying it would probablyswitch brands.LITERherry 24CherA&P3 LITERCola1 LITERLica-Cola3 LITER 1014 FL OZ (3Just how much monopoly power does General Foods, the producer of Maxwell House,have with this brand? In other words, how elastic is the demand for Maxwell House?Most large companies carefully study product demands as part of their marketresearch. Company estimates are usually proprietary, but two published studies of thedemands for various brands of colas and ground coffees used simulated shoppingexperiments to determine how market shares for each brand would change in responseto specific changes in price. Table 12.1 summarizes the results by showing theelasticities of demand for several brands.1 Table 12.1 Elasticities of Demand for Brands of Colas and CoffeeColasGround coffeeRC ColaCokeFolgersBrandMaxwell HouseChock Full o'NutsElasticity of Demand-2.4-5.2 to -5.7-6.4-8.2-3.6First, note that among colas, RC Cola is much less price elastic than Coke. Although ithas a small share of the cola market, its taste is more distinctive than that of Coke,Pepsi, and other brands, so consumers who buy it have stronger brand loyalty. But eventhough RC Cola has more monopoly power than Coke, it is not necessarily moreprofitable. Profits depend on fixed costs and volume, as well as price. Even if itsaverage profit is smaller, Coke will generate more profit because it has a much largershare of the market.Second, note that coffees as a group are more price elastic than colas. There is lessbrand loyalty among coffee buyers than among cola buyers because the differencesamong coffees are less perceptible than the differences among colas. Note that thedemand for Chock Full o' Nuts is less price elastic than its competitors. Why? BecauseChock Full o' Nuts, like RC Cola, has a more distinctive taste than Folgers or MaxwellHouse, and so consumers who buy it tend to remain loyal. Fewer consumers notice orcare about the taste differences between Folgers and Maxwell House.With the exception of RC Cola and Chock Full o' Nuts, all the colas and coffees are quiteprice elastic. With elasticities on the order of -4 to -8, each brand has only limitedmonopoly power. This is typical of monopolistic competition.

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Demand elasticity measures how sensitive a good's quantity desired is to variations in its price. It…