Question

Explain the role of brands in a monopolistic competition market. How can the pricing and profits for a firm in this market structure differ from perfect competition and when will the two market types reach the same outcome? Why does that make it essential for firms to have a strong brand identity? Give an example of a product with this type of market structure and discuss (briefly) how the firms have established their brands.

Answer 1

SOLUTION:-

* In Monopolistic Competition Market there are large number of sellers and buyers of a particular product. Brand plays an important role in this type of market. Sellers have a unique brand identity and they sell differentiated products to the customers.

* The products are not perfect substitutes. If a particular brand is more popular then seller of such brand can charge more price for that brand and can generate larger profits and can also increase its market share. Due to product differentiation and brand popularity seller in such a market from can earn huge profits.

* The demand curve of Monopolistic Competitive Market is downward sloping as sellers control the price of the product.Sellers will charge the price that is more than the marginal costs. In perfectly competitive market demand curve is perfectly elastic.Many of the firms sell the same product. There is no control over the price and the same price is charged in the whole industry.

* In monopolistic competitive markets the firms earn positive economic profits in short run due to difference in brand identity. But in long run consumers assumes that all products are same so, the firm earns zero economic profits. This is the similar to perfect competition where homogeneous products are being sold. In the long run both of them produce similar results.

* Star Bucks is a famous coffee house chain. It is an awesome example of Monopolistic Competitive Market. It has a unique brand identity and has large share of loyal and satisfied customers who are even ready to pay high price for their favorite coffee.

* It has achieved this brand identity by supplying quality coffee to the customers. The expensive crockery used, the customer service and hospitality offered and above all the remarkable infrastructure of the coffee houses have helped Starbucks to establish a unique brand identity in the market.

* In monopolistic market brand popularity plays an important role. Customers will buy the products of a particular brand only. They are even ready to pay high price for the products of particular brand as they are attached to a particular brand only.

* Example a customer having brand loyalty for Loreal brand will only buy loreal products even if they are expensive as compared to other products. Strong brand identity helps the firm to attract more loyal customers and capture large market share and earn enormous profits.

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