Question

Does product differentiation in monopoly competition make us better or worse off? Why?

Answer 1

Since a monopolistic firm is that form of market in which there is large number of buyers and sellers and firm sells differentiated product based on quality, size, shape etc, therefore product is not homogeneous. Since firm is price maker but firm does not compete on the price but they compete in the market based on size, quantity quality etc. In short-run a monopolistic competitive firm profit-maximizing condition is

MR=MC

In the monopolistically competitive market, firm does not change price but uses non-price factors for affecting their sales. But in this market firm can earn positive economic profit in the short-run.

Since the monopolistically competitive firm produces differentiated product which is slightly different in quality, quantity or packaging from another competing firms. But due to this firm is able to maintain the same price level and therefore firms realize monopoly power. Hence firms are better off but consumers are not better off because they have to pay the same price for the use of the same product but slightly different in size, quality or quantity.

Hence consumers are worse off.