Question

Briefly explain the two sources of consumer welfare increase in the Krugmanís model of monopolistic competition when markets integrate

Answer 1

Monopolistic competition is when many firms are selling goods which are differentiated by logos, names of companies etc. There are many buyers and sellers but the sellers are selling heterogeneous or differentiated goods.

When markets integrate, which could be trade between two nations, the consumers tend to gain in two ways:

Usually the domestic market produces goods which are demanded by majority of the country. People consume goods depending on their tastes , cultures and preferences. So sometimes a group of people who are small in number but have different preferences and habits are left out. When trade occurs, the demand for these people are fulfilled by the imports and foreign trade which means an essential benefit to the people of the country , even when they are small in number. This could be true for a number of countries that trade and hence integrating could be proved beneficial for both the countries.

Another benefit or welfare to consumers is the variety of goods which is available. Since it is monopolistic competitive market, the goods would differ from each other ie would be substitutes but not perfect. This would give the people access to wide variety of goods and services. Also when markets integrate, there is competition between firms, which would mean better quality of goods, better service etc .

This would also be beneficial for the consumers , for they could take advantage of the freebies, lower prices , discounts etc when firms compete and markets integrate.

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