Answer to Question #70014 in Macroeconomics for Manmeet Singh

Question

Define and explain with an example why firms resort to product differentiation under monopolistic and oligopolistic market structures.

Answer 1

Within the framework of a monopolistic market structure, each firm: sells a special type or variant of a product that is different in quality, design or prestige; is a monopoly producer of its brand of goods. The size of the monopoly power that a firm possesses depends on its success in differentiating its product in comparison with the products of other firms. There is only one producer of Big Mac sandwiches, only one AleSmith beer producer, only one publisher of Conde Nast Traveler magazine, etc. Nevertheless, they all face competition from companies offering substitute products, that is, they operate in conditions of monopolistic competition.
Oligopoly occurs when a small quantity of suppliers control a significant share of the supply of products. In this case, each supplier must take into account the reactions of other suppliers to changes in market activity. If the goods have a trademark and are not perfect substitutes (and the difference between goods can be either real (according to technical characteristics, design, manufacturing quality, provided services) and imaginary (brand name, packaging, advertising), then products are considered differentiated, and the industry is called a differentiated oligopoly. Examples can be markets for cars, computers, televisions, cigarettes, toothpaste, soft drinks, beer.