Microeconomics Monopolistic Competition

Question: Discuss about the Microeconomics for Monopolistic Competition. Answer: Introduction: Apart from product advertising, businesses operating in a monopolistic type of market can increase their profits through product differentiation. Product differentiation is the practice distinguishing a service or commodity from others through the incorporation of various attributes such as price, benefits, styling, quality, service among others. (Besanko, Braeutigam, Gibbs, 2011). Setting a particular price which is lower compared to that of other competitors is among the components of product differentiation which is meant to maintain and increase the level of demand. Product differentiation can take various forms for example physical commodity differentiation. This is where businesses use design, shape, size, performance, and form to create uniqueness in their products. Firms can also differentiate their goods and services using various types of shopping such as through the internet. Through internet shopping, for example, a company will be able to capture large clientele compare d to other sellers who don't use the internet. Make a case for why monopolistically competitive industries never reach long-run equilibrium. Earning of supernormal profits in the short-run attracts new firms in the long-run which in the process will reduce the economic profits made before to zero level. At this level, companies in the industry will earn normal profits. At this stage there will be no product differentiation and no firm will get excess returns because, all businesses have similar products concerning price, quality, and design. In reality, this stage is unattainable since, in the long run; new firms enter with new products which imply a start in the product life cycle. Other businesses' commodities might be experiencing either final stages of the cycle or exponential stage. This difference in product life cycle implies that companies in the industry will receive different earning depending on the stage of their goods in the product's life cycle. Therefore, attaining equilibrium will never be possible. References Besanko, D., Braeutigam, R. R., Gibbs, M. (2011).Microeconomics. Hoboken, NJ: John Wiley.