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Explain the role of brands in a monopolistic competition market. How can the pricing and profits for a firm in this market structure differ from perfect competition and when will the two market types reach the same outcome? Why does that make it essential for firms to have a strong brand identity? Give an example of a product with this type of market structure and discuss (briefly) how the firms have established their brands.

Question

 

Explain the role of brands in a monopolistic competition market. How can the pricing and profits for a firm in this market structure differ from perfect competition and when will the two market types reach the same outcome? Why does that make it essential for firms to have a strong brand identity? Give an example of a product with this type of market structure and discuss (briefly) how the firms have established their brands.

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Step 1

Monopolistically competitive market is one of the four market forms where there are large number of sellers and buyers of a particular product and the sellers sell differentiated products in the market by establishing a unique brand or identity of their product in the market. Therefore, products in this market form cannot be considered as perfect substitutes like in perfectly competitive market; hence, brand plays a vital role in this market form. The term brand can be categorized as a unique feature to differentiate one product from another. Further, due to brands popularity, the seller can charge a higher price in the market and in return able to generate higher sales, covers large market area, etc.; thereby, able to generate higher profits due to product differentiation and non-price competition.

Step 2

In the monopolistically competitive market, the demand curve slopes downward due to individual sellers’ control over the price of the product; however, in the perfectly competitive market, the demand curve is perfectly elastic depicting homogenous products, no price control and the same price is charged for the whole industry. Further, in the monopolistically competitive market the firms are able to earn positive economic profits in the short-run due to difference in brands identity, but in the long-run consumers’ assumes all products to be identical and due to this reason, the monopolistically competitive market earns zero economic profits in long-run which is same as in the case of perfectly competitive market. Hence, in the long-run both markets generate same outcomes.     

Step 3

Brand identity in the monopolistically competitive market plays a crucial role as the consumers’ mostly demand the product according to the brands they desire to have (preferred more); therefore, consumers’ who are brand stricken will always buy a particular brand of their choice irrespective of price from the market and even the consumers’ are most likely to pay more high...

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