How does monopolistic competition pose a tradeoff between lower prices and greater product diversity? Concept Introduction: Monopolistic Competition An imperfect market competition with a large number of sellers selling differentiated product is called the 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 - The 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.

Question

Want to see the full answer?

Answer 1

Question

Chapter 15, Problem dWYWL

To determine

How does monopolistic competition pose a tradeoff between lower prices and greater product diversity?

Concept Introduction:

Monopolistic Competition An imperfect market competition with a large number of sellers selling differentiated product is called the 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 - The 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.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

1. Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter." a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend," measured by the increase in butter production? Explain.

A health study tracked a group of persons for five years. At the beginning of the study, 20%were classified as heavy smokers, 30% as light smokers, and 50% as nonsmokers. Resultsof the study showed that light smokers were twice as likely as nonsmokers to die duringthe five-year study, but only half as likely as heavy smokers.A randomly selected participant from the study died during the five-year period. Calculatethe probability that the participant was a heavy smoker

Consider two assets with the following returns: State Prob. of state R₁ R2 1 23 13 25% 5% 2 -10% 1% Compute the optimal portfolio for an investor having a Bernoulli utility of net returns u(r) = 2√√r+ 10. Compute the certainty equivalent of the optimal portfolio. Do the results change if short-selling is not allowed? If so, how?