Answer to Question #288900 in Microeconomics for Daniyal

Question

Q.1 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

1. Impact of opening a new store

There is a mix of perfect competition and monopoly in monopolistic competition. They set their prices like a monopoly firm, starting at MR=MC and working their way up to the demand curve, and they promote as if they were in perfect competition. It can be seen in the graph above at D1 where the price P1 would be if there were only one firm. The old firm will drop to P2 when the new firm joins the market, and demand and marginal revenue will shift to the left at D2. If the marginal revenue exceeds the marginal cost, the company should continue to expand because each additional product sold generates extra profit. The company must downsize if the marginal income is less than the expense. The original company must find a means to acquire new clients while maintaining the loyalty of existing ones. Customer loyalty can be viewed as a barrier to the entrance because who knows if customers will switch to a different product.

2. Strategy to defend market share

Product diversification or differentiation

Product differentiation is what keeps these businesses afloat. Consumers would simply go to the closest store if retailers selling the same goods were situated in various places. This is a type of location distinction that can also be classified as product differentiation. There must be a way to distinguish these locations.