Question

Suppose you manage a local grocery store, and you learn that a very popular national grocery chain is about to open a store just a few miles away. Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). What will happen to your profits? Please show graphically and explain your reasoning in detail. For example, how and why do profits change? How can that be seen on the graph? What could you do to defend your market share against the new store?

Answer 1

There are various factors that are responsible for the change in profits. They are as follows:-

1.Price of the commodity. (Increase or decrease)

2.Fixed cost- However these costs remain fixed it may effect the profit of the firm.

3. Variable cost (May fluctuate with the volume of production and units solds). The best quality is its changing nature. Example- Taxes, cost of factors of production like raw materials etc.

If the prices increase there will be fall in the demand and the rival can take the advantage by maintaining the stability in price level.

Any trade can increase the market size if larger quality of products are available at reasonable rate.

We can defend our market share against the new store by following methods:-

1.By maintaining position defence in the mind of consumers by making the brand impregable.

2. Preemptive defense. Plan proper strategies. Attack the rival before its offense.

3. Contraction defense- Sometimes big stores assume they can target the large consumers because of weak rivals. We can take the advantage of his assumption by planning strategies and providing better service to the consumer group.

4. Hold in the current market shares.

5. Using creative marketing skills to carter to the need of customers.