Question

Molly’s Monopolistic Competition

Our final look at Molly’s coffee shop will be through the lens of monopolistic competition. Molly is considering purchasing this company and she is now aware of the market structure but needs some advice as to how differentiation will work specifically in her shop. She also needs to better understand how to maximize her profits.

For this assignment, please provide Molly with some concrete information she can use. You should have an overview of the market structure and some key ideas to apply with respect to differentiation, profit maximization, pricing or any other key points you find for this market structure.

Your analysis should be approximately 1-2 pages in APA format with in text citations and References where appropriate

Answer 1

MONOPOLISTIC COMPETITION

first of all, we will discuss the meaning of monopolistic competition. it Is a market situation in which there are many sellers selling differentiated products. this means that there is some difference in products of different sellers which may be on the basis of weight, design, shape etc. for example, let us take the soap industry. among the well-known brands are lux, dettol, liril etc. on close inspection it is found that each has some variation - like lux is exhibited to be a beauty soap, liril is associated with freshness and so on. thus, firms selling different brands of soap form monopolistic competition. this is the most common structure seen in real world. it is actually a combination of two extremes- perfect competition and monopoly. it has maximum features of perfect competition but differentiated products give the sellers some power to influence the price, which gives this market an important feature of monopoly.

now we will see the features of monopolistic competition and also some key ideas that molly can apply with respect to differentiation, profit maximisation, pricing etc.

1. selling costs

these are the expenses which are incurred for promoting sales, which basically includes expenses on advertising. since every seller has a differentiated product, each seller does heavy advertising to attract the customers. as a result, brand royalty is developed and consumers are ready to pay even a bit higher price.

in molly's case, she has to bear selling cost in the form of newspaper advertisement, providing free coffee for first 15 days etc. it will help molly to gain royalty in the market and thus attract customers.

2. profit maximising

price line facing a firm in monopolistic competition is negative sloped because the firm can sell more by reducing its price.

in molly's case, she too has to keep the prices low if she wants to sell more of its units. after some time, she can raise the price of coffee.  thus in long run, it will help her to maximise profit.

3. product differentiation

in monopolistic competiton, the products

of different sellers are differentiated on the basis of brands. these brands are generally so much advertised that a consumer starts associating the brand with a particular manufacturer and a type of brand loyalty is developed.

also, molly has to make her coffee differentiated by serving the best quality among the sellers present in the market. it will help her to gain brand loyalty too.

THANK YOU !!