Answer to Question #288513 in Microeconomics for uzair

Question

Suppose you manage a local grocery store and you learn that Imtiaz super Market is about to open a store near you.

Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). Note, we are assuming you each sell one representative good.

Explain how the opening of this new store may affect your business. Be sure to address what can happen to your customers, supply and demand, and prices. What will happen to your profits? Show graphically and explain your reasoning in detail. 

Explain at least one strategy that could be used to defend your market share against the new store (e.g., address what you are going to do to keep your customers).

Answer 1

The entry of a supermarket will drive down the demand for the existing grocery store which reduces output and price . In the long run this entry reduces the super normal profits. Supply for my grocery is likely to reduce as my suppliers will now be supplying to the new supermarket.

Strategy to keep my market share

I will use a pricing war in which I will commit to matching or beating a competitor on price to keep my loyal customers and get more potential.