Chapter 15, Problem 2P

To determine

The ways of differentiating your product in the coffee shop market in monopolistic competition.

Concept Introduction:

Monopolistic Competition - An imperfect market competition is where there are large number of sellers selling differentiated products and is referred to monopolistic competition. It exhibits the elements of both a monopoly and perfect competition. The defining characteristics of the market are- It has a large number of firms, relative free entry and exit of firms, product differentiation, imperfect information, transportation costs, inelastic demand and inefficient production.

Product Differentiation Product differentiation can be physical or psychological. Physical differentiation implies difference in packing, size, shape etc of near identical products. This can further be categorized into horizontal or vertical differentiation. The former refers to the situation where the consumers base their decisions on subjective preferences while the latter refers to one where products differ by quantitative or qualitative factors like technical properties, level of technological sophistication.

Psychological differentiation is a marketing process wherein the seller makes the customers believe that his product is unique and superior to that of his competitors. This creates a sense of value for the product of the seller and their sales and profits increase.