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. Three characteristics of monopolistic competition are :

• There are large number of buyers, and the numbers of sellers are many.
• The products are similar, but non-homogeneous. This is the most striking and primary feature of monopolistic competition that product differentiation exists and goods are closely related.
• Unrestricted entry and exist of firms. This freedom is what causes the neutralization of short run abnormal profits in the long run.

B. It can be safely argued that monopolistic competition is the most closest model of many real world product markets. Indeed, the perfect competition and monopoly are the two extreme representations of real world products. If I were a business manager of a company operating in a monopolistic competition market, to entice consumers to buy my products instead of your competitors' products that are virtually the same as my products, I would recommend an increase in advertizing expenditure. The advertizing is kind of the sole determinant of increase in sales in monopolistic competition. It is the only way to potray products in monopolistic market 'differently'. Even the empirical analysis include this factor as a cost of production. Thus, advertizing is which I would recommend, to reveal the different aspect of the product.