Question

A. Set forth and describe 3 characteristics (only 3) of monopolistic competition.

B. If you were the business manager of a company operating in a monopolistic competition market, what would you recommend the company do in order to entice consumers to buy your products instead of your competitors' products that are virtually the same as your products?

Answer 1

A. Monopolistic competition refers to a market situation in which there are large number of buyers and sellers. The sellers sell closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the most important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under monopolistic competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic. Example: Firms producing different brands of shampoos like Sunsilk, Pantene, Head & Shoulders, Dove etc. Monopolistic competition combines the features of monopoly and perfect competition.

B. Firm would have to incur selling cost i.e. expenditure on advertisement to promote its sales.