Chapter 9, Problem 11P

To determine

Concept Introduction:

Product Differentiation: It is one of the most important features of monopolistic competition. It means that the product is differentiated from each other, they are not a homogeneous good. In such markets, product differentiation helps in reducing the intensity of competition between firms. Product differentiation is generally based on three types:

• Based on quality: the products are differentiated based on quality. Take an example of toothpaste, some companies offer toothpaste with large salt and calcium amount, some offer it with mint and odor and so on. So that consumers have choices to distinguish between two products and choose according to their choices.

• Based on location: Consumers always prefer goods which are closer rather than cheapest hence, location always plays a vital role in product differentiation. For example, consider a situation, one always prefers the dry cleaner which is nearer to the house.

• Differentiation by Style or Type: Differentiation of product is made based on style and type, consumers use. For example, there are different categories of books like biography, detective, romance and so on. It completely depends on the consumer what he likes.

Monopolistic competition: Such a market structure has a less amount of competition Examples; detergents textiles, automobiles, shop drawings, TV, etc. The features of monopolistic competition are:

• Large number of buyers and sellers: In the monopolistic competition market, there are a large number of sellers and buyers.
• Product differentiation: This is one of the most important features of monopolistic competition. The product of the sellers is differentiated but are close substitutes of one another. It can be real or artificial. The demand curve monopolistic firms face is an elastic demand curve.
• Free Entry or Exit: There are no barriers to entry or exit, firms can easily enter or exit the market.