Question

4

Describe why product pricing differs in a competitive versus an imperfect (monopolistic) market. How might firms differentiate their products in a competitive market and why would such a strategy be advantageous?

Answer 1

Answer) In case of a competitive market both consumer and producer are price taker due to large number of them existing in the market. The presence of perfect homogeneous goods in a competitive market hinders the producers from earning supernatural profits.

However in case of monopolistic competition, even though the number of consumer and producers are large in the market but the existence of differentiated goods allows for the possibility of supernormal profits in the short run.

Differentiated products like Pepsi and coca cola works upon the different taste and preferences of the consumer. For which the consumer is willing to pay a different price, which is higher from the marginal cost. The presence of marketing and advertisement cost in the form of mark up, also incentives the consumer to go for a particular product.