Question

How do monopolistic competitive firms use discount coupons to lower their prices? How do these same firms use Facebook “likes” to differentiate their products? Why is using discount coupons by monopolistic competitive firms different than starting a price war?

Answer 1

A. Monopolistic firms use discount coupons to gauge the reserve price of different types of customers. Since the firm is a monopoly firm, it will actually want to sell the product at highest possible profit. But each increase in price would remove some customers whose reserve price (the maximum they are willing to pay for that product) is lower than the new price. They would not even buy the product now. This will rather reduce the total profit. The best possible situation for the firm is to have all customer buying the product at their reserve price- cause then each customer would be paying the absolute maximum he/she would pay for that product.
So monopolistic firms use discount coupons for customers whose reserve price is lower than the current price. This way they lower the price for those customers.

B. A monopolistic firm uses the Facebook likes data to understand a particular market region or demographics better. For example, it might get more likes from Gen X on one kind of product post, but another product post might get more likes from millenials. Similarly, one product post might get more likes in Virginia but another in Texas. All these demographics help the monopolistic firm to differentiate its products according to geography, age etc.

C. Use of discount coupons by a monopolistic firm is different than starting price war because monopolistic firm has no competition, so no price war can be started by any other company. In a price war in competitive market, other firms would've also reduced their prices to undercut this firm. But here discount coupons only serve to lower prices for lower reservation prices customers, as discussed in A.