Question

Identify a product that is monopolisticly competitive. Specifically, define what products it could be substituted for and also what characteristics make is differentiated from those products. Discuss what the seller of the product could do to increase the differentiation of that product, and
Discuss what impact increasing the differentiation of that product would likely have on the products price and the seller's profits earned from the product.

Answer 1

Let us take the example of soft drinks market to answer this question .

Our product is Coca cola . It has numerous substitutes in the market . Some are almost identical like pepsi , thumbs up etc , others are different flavoured sodas like fanta , mountain dew etc . There are many companies selling soda or soft drinks which are slightly differentiated from each other , which makes this market a monopolistically competitive market . These drinks can be differentiated on the basis of brand , flavour, colour , packaging , advertisements etc .

Seller of coca cola can do non-rpice competition like introducing new versions of the drink , diet coke , zero calorie coke , other flavoured coke etc . This is one way to increase differentiation of product . Another inportant way is advertisement and increasing brand popularity .

If differentiation is increased then coca cola gains some degree of market power , so they can charge more price . Seller's profit increases and more soft drinks companies are lured in the market or other companies also try new methods to create differentiation , this ultimately drives down profit to zero in long run .