Product differentiation is the greatest source of market power for which of the following market structures? A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly. Your answer: D was incorrect. The correct answer was B) Monopolistic competition. Product differentiation gives market power to firms under monopolistic competition by making the firm the sole producer of a slightly differentiated good. OK well I understand that product differentiation is a key characteristic of monopolistic competition. But the greatest source of market power would be for a monopoly no? A monopoly exists when there are no good substitutes. That is the ultimate product differentiation no? I think if they phrased this question differently it would’ve been better. any thoughts?
If there are no close substitutes, what’s the benefit of making the good differentiated? and differentiated from what? there is no comparison measure in monopoly. There is some in oligopoly, maybe, but the greatest benefit/impact from differentiation is in a monopolistic competition.
It is B. Also to consider that in Monopolistic competition, advertising and marketing campaigns are very importatnt.
The answer has to be D. They want to hear b, but it’s d. If you are a monopolist and you are able to differentiate the products, so that each customer pays, what he is willing to pay --> then you have full market power. (personal price discrimination (1st order)) The whole consumer rent is converted to producers rent, without having a dead loss as usuall in monopoly markets. --> maximum market power for the supply side.!
Without product differentiation, a firm in monopolistic competition goes bankrupt. Without product differentiation, a firm in a monoploy doesn’t care. Answer is B.
Dreary Wrote: ------------------------------------------------------- > Without product differentiation, a firm in > monopolistic competition goes bankrupt. > Without product differentiation, a firm in a > monoploy doesn’t care. > Answer is B. in a general way it’s B. But if you consider cases of price discrimination then it’s D.
So yes the questition is poorly phrased.
Price discrimination is charging different prices to different market segments, for the same product: charging students less than regular turists, or first class turists more than regular turists, on a feryboat trip to some location accesible only by water, service provided by only one transporter that acquired the license to provide the service. There is no need for differentiation in the service, because there is no competition to differentiate the product offered (transportation).
Yeah but map1 price discrimination is most interesting in monopoly, because there is no competition Why should an enterprise just give one price, if it could get the maximum amount of each consumer? Simple Example: Consumer A is willing to pay 5 Consumer B is willing to pay 6 Consumer C is willing to pay 7 If MC=3 const. Then i would be best off if i could take from A 5 from B 6 and from 7 $ (assumption for this example marginal costs are the same or only slightly increasing) Just believe me map.
It charges the maximum a market segment can afford to pay for it. It charges $5 for consumer A because that’s the maximum he can afford paying. At a $6 price, consumer A would not buy, while the enterprise will not get the benefit of charging $7 for consumer C if only one price is charged on all consumers. At $7, neither A nor B would buy, but C will.
With perfect price discrimination: a pays 5 bucks b pays 6 bucks c pays 7 bucks That’S why it’s called price discrimination. Maximum profit and market power in a monopoly.
Not because the product is differentiated, but because only a monopolist can charge different prices for the same good.
Good point map and i love discussing with you. But… …in order to differentiate your price you have to differentiate your product as well. So product differentiation (in combination with price differentiation) is the greatest source of market power in a monopoly.
That can happen with monopolies or any other type, but that’s not the point of the question, though.
> So product differentiation (in combination with price differentiation) is the greatest source of market power in a monopoly. Same for Monopolistic competition and oligopoly…!
–> in a perfect competition it’s not possible. --> in an oligopoly and monopolistic competition the market power effect is less than in a monopoly A monopolist with perfect price discrimination and slightly differentiated products is strongest and most powerful.
Map, if you see it from a macro view you are right. if you watch the small monopolistic competition entities in a micro view in comparison to the monoloply firm you would be wrong. Anyway what i wanted to say: the question is poorly phrased.
> A monopolist with perfect price discrimination and slightly differentiated products is strongest and most powerful. A monopolist is strongest and most powerful, without these two functions. That’s what I think you are missing, cfaisok.
Dreary Wrote: ------------------------------------------------------- > > A monopolist with perfect price discrimination > and slightly differentiated products is strongest > and most powerful. > > A monopolist is strongest and most powerful, > without these two functions. That’s what I think > you are missing, cfaisok. A monopolist with price discrimination of first order is even stronger 
Wait a minute! You may have a point. You are saying if we add product differentiation to each of these market structures, which one will be more powerful? That would be a different question, and i think your analysis is correct in this case.