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

Monopolistic competition is a type of imperfect competition in which the firms sell differentiated goods which are not perfect substitutes of each other.

They earn higher profits than the perfect competition but lower than monopoly and they will reach same outcome only then there are homogenous goods and no barriers to entry or exit and the consumers are the price maker.

It is important for a firm to have a strong brand identity because the firms can only earn more profits than normal if they can make their brand stand out and have a brand value so that consumers prefer their brand to others.

The products that fall into this category are clothers, coffee shops, drycleaners etc, they all provide differentiated goods. Zara, forever 21 are some examples of clothing brands, starbucks is an example of coffee shops etc.