Monopolistic competition is a type of competition whose products are differentiated so as to satisfy the consumer needs therefore helping a firm to make more profits. In this type market structure sellers of the products are in large numbers (Chamberlin, 2011).In monopolistic competition, the competition is not perfect. Making an entry and exit is very easy whereby a firm can make profits with a stable economy and make losses in an unstable economy but in the short run.
There is less differentiation of the products. This compels many sellers to depend on advertising so as to reach out to target customers winning their loyalty over substitute products. This will eventually affects the demand curve making it elastic or inelastic.
There is lack of interdependence between the prime firms. Each firm formulates its own policy on price and output independently because it is not concerned on what the close competitor decides to charge for their goods and services.
Firms in a monopolistic competition make independent decisions on the pricing policy. They end up coming up with prices that do not depend on their rivals. It gives firms the authority to increase their sales by lowering their prices at will to increase the demand in the market.
Elasticity of demand
Elasticity of demand is explained by the theory of demand where it can either be uniform, elastic or inelastic. It is affected by alternative products. For instance, a rise in the price calls for cheaper alternative goods while a decrease of price of alternative products affect the chain of demand (Mankiw, 2012). When Jane lowers the price of her goods, the demand increases, attracting more customers but the initial average cost decreases in respect to the increase of price. A change in price leads to a change in the quantity demanded and this defines elasticity of demand.
Consumers are aware of price changes when the elasticity of demand is high hence should remain at a moderate level. At Jane’s book store, the demand is elastic since when she lowers her prices customers increase. Using mathematical calculations, when elasticity of demand is more than one the demand is price elastic, when its equal to one the demand is unit elastic while when it is less than one the demand is price inelastic hence Jane shouldn’t lower her prices to a point where the elasticity of demand is less than one since it will affect the quantity demanded negatively
Therefore, when coming up with the right kind of price for the goods, Jane should come up with a price that is neither too high, as this would benefit her competitors since she would not be able attract customers to buy the goods at exorbitant prices.
Ways on how to differentiate the book store and its products
Product differentiation refers to creation of unique products through additional or special features and branding help to make products differ (Magin, 2007). With an effective distribution channel and reliable services, it’s a strategy that helps to gain market power that has a resultant effect on return on investment.
Product differentiation entails quality or appearance differences in the products. It encompasses the actual differences in how they function, their design and the material that is used to make the product (Magin, 2007).The best strategy that would work for my store is the ability to respond to change in the market and produce high quality goods at a lower price than that of competitors in the market. This would help me win more customers in my bookstores.
Differentiation strategy is a must-do for companies that want to improve product value to make them identifiable among others (Magin, 2007). It is also important to identify close competitors and get to know their SWOT analysis. That means a company that knows their strengths and weakness and their forecasting ability has a competitive edge over prime competitors. The objective of differentiating products is to make price not the only determinant factor when it comes to sales and purchases from consumers
Pros and cons of different methods of differentiation
Positives
A firm may derive some fee from its products or corporate services mostly in form of good will.
The firm also gains an independent market share through product differentiation and lack of competitive products is a plus to the firm.
Negatives
Branding of products with unique features can be really expensive hence a firm may take long to establish unique products.
Imitation too is a negative attribute of differentiation and a firm may be at risk of losing its market share to the imitating company.
Competition is a threat to differentiation hence many companies prefer to compete with factors such as price, quantity and quality to attract more customers who are privy to price sensitivity.
Profits expected in the long run
For a perfectly competitive market, in the long run, it will make normal profits. Generally normal profits are achieved when equilibrium in the economy is achieved.
References
Chamberlin, E. (2011). The theory of monopolistic competition. Cambridge: Harvard University Press.
Magin, V. (2007). Competition in Marketing. Wiesbaden: Springer Fachmedien.
Mankiw, N. (2012). Principles of microeconomics. Mason, OH: South-Western Cengage Learning.
