Question

Select a firm in an industry that operates in a monopolistic competition market structure. Some questions to ponder as you write this area of the assignment are: -What are the basic assumptions of a monopolistic competitor? Explain in your own words what the assumptions imply for the firm that you have chosen. -How do the assumptions you've identified above affect the price a monopolistic competitor charges for their product/service? -What is differentiation for the monopolistic competitor you've chosen?

Answer 1

The company selected for the consideration as a firm in monopolistic market structure is Apple.

The basic assumptions of the monopolistic competition are as follows.

1. There are free entry and exits of the firms in the market.

2. Firms differentiate themselves from each other on the basis of different aspects such as design, quality, features

3. Firms are price makers in the industry

4. In the long run, firms make zero economic profit.

5. Firms exhibit inefficiency and excess capacity in the long run.

The assumptions imply that the Apple company produces goods that must be differentiated on its multiple dimensions, the company must be able to charge price what it wants to put on the products and the company also faces competition as many firms can enter and exit the industry. Besides, the company if persisted with one model only, then long run economic profit will be zero.  In reality, the company produces goods like iPad and iPhone that are most popular and differentiated products in the world. It makes the company to put value based pricing upon these products that is much higher than the cost of production. The company keeps coming up with new models so the long run zero economic profit is never materialized.

The assumptions make the company to charge a  price that is value based and not cost based. It means price is very high and it has not to do with the cost of production. It makes Apple to be a company that is price maker.

The differentiation is the specific design of the products such as iPhone, ipad, specific functions that is only available in Apple products, the value increased for the consumers who buy these products (psychographic factor) and superior and patented technology used to produce these goods.