Question

Consider the hand bag market.

Assume this market is monopolistic competition.

1. Select a company and its handbags and explain how their handbags are distinguished in the market. (For example, Bottega Veneta uses a cross woven leather that makes its hand bags, supple, durable and attractive).

Because of that distinguishing characteristic, assume your company is earning a profit.

2. Please draw a monopolistic competition diagram showing that your company is earning a profit (note: careful with the demand line - it should be distinguished from a monopoly diagram - see section 10.1 in your text and the diagrams in "perceived demand …)

3. Assume now that competition has heated up and a competitor has a handbag out that is similar to your own (For example Michael Kors might come out with a cross hatched leather hand bag). Please explain this competition and show how it effects the demand of your handbag as well as your profits on the diagram.

4. Given this event, assume that your company would like to maintain its profits. Explain what it might do, and explain how it would effect your diagram.

5. Please explain some of the efficiency issues with monopolistic competition as they relate to your example..

6. Please explain some of the advantages of monopolistic competition as they relate to your example.

Answer 1

Monopolistic competition is form of marketwhere there are large number of buyers and sellers and there is product differentiation.

For example , lets take handbags of "LAVIE" which Fashioned products from exclusively rich materials resulting in exquisite designs and beautiful colours and its main feature of this brand is that it supply wide range of variety to customers so that they don't had to go for look to any other brand.

In graph of monopolistic , demand curve is flatter (because of close substitute present)

where as in monopoly graph, demand curve is steeper.

If the firms are earning economic profit or super normal profit in short run then they will attract new firms as theie competitors to enter the market which will increase the supply and thereby increasing the competition among the sellers, as a result price will start falling there by reducing the profits . This continues till all firms start earning normal profit.

Because monopolistically competitive firms do not operate at their minimum average total cost, they, therefore, operate with excess capacity.Which further let the firms to face losses if they continue breaking each other profit margins in the short run which will force the weak firms or the firm just flourished to leave the market

so there will be subsequent decrease in the supply and also competition among sellers reduces. As a result price starts rising and this will continue till the firms start earning normal profits.

* To maintain the profit a firm may have a patent or trademark on its product which prevents competition. In such cases, firms conquer some percent of market that would allow them to price their products above competitors' prices without losing too much business.

when there is competition with increase quantity also they had to reduce its price but with patents and copyrights they can charge the price above than competitors.

If we are considering efficiency issues then we consider productive and allocative efficiency issues.

Productive efficiency comes into existence when a market is using all of its resources efficiently.IT happens when MR equals the product's average total cost. In a monopolistic competitive market, firms always set the price higher than their marginal costs, which results in inefficient production.

Allocative efficiency comes into existence when a good is produced at a level that maximizes social welfare. This occurs when a product's price(mr) equals its marginal benefits(MC), which is also equal to the product's marginal costs. Again, since a good's price in a monopolistic competitive market always exceeds its marginal cost, the market can never be allocatively efficient.

Advantages of monopolistic market:

• in monopolistic competition , there is product differentiation which make it more attractive to target the market
• non price competition, is the feature which helps major in targeting the desired market.
• setting the price higher even with close substitutes with marketing strategy is the main advantage
• it can also increase the product quality with material and branding of product.
• with copyrights and patent we can increase the profit whatever hieghts we want.