National Law Institute University Bhopal

Product Differentiation in a Monopolistic Competitive Market

Economics-I

Trimester-I

Submitted by: Submitted to:

Anurag Rajput 2019BALLB120 Asst. Prof Mr. Rajesh Gautam

Kratik Barodiya 2019BALLB98

Ajit Jaiswal 2019BALLB83

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Certificate

This is to certify that the research paper titled” Product Differentiation in Monopolistic
Competition” has been prepared and submitted by Anurag Rajput, Kratik Barodiya and Ajit
Jaiwasl who are currently pursuing their B.A.LL.B(Hons.) at National Law Institute University,
Bhopal in fulfillment of Economics-I course. It is also certified that this is an original research
report and this paper has not been submitted to any other university, nor published in any journal.

Date-

Signature of the student-

Signature of Research Supervisor-

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Acknowledgement

The project has been made possible by the unconditional support of many people. We would like
to acknowledge and extend my heartfelt gratitude to Asst. Prof. Mr. Rajesh Gautam for guiding
us throughout the development of this paper into a coherent whole by providing helpful insights
and sharing his brilliant expertise. We would also like to thank the officials of the Gyan Mandir,
NLIU for helping us to find the appropriate research material for this study.

We are deeply indebted to our parents, seniors and friends for all the moral support and
encouragement.

- Anurag Rajput 2019BALLB120

- Kratik Barodiya 2019BALLB98
- Ajit Jaiswal 2019BALLB83

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 Table of Contents
Sr. no Topic Pg. No.

1. Synopsis 5-6
2. Introduction 7
3. Pillars of Economics 8
4. Market-meaning and types 9-11
5. Monopolistic Competition 12-14
6. Product Differentiation 15-16
7. Effect on Firms 17-19
8. Price theory aspect 19-21
9. Market Price Aspect 21-25
10. Firm’s revenue aspect 26-28
11. Implications 28
12. Criticisms 29-30
13. Conclusions and Suggestions 31
14. Bibliography 32

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Introduction

Economics have been derived from the Latin words “Oikos” and “Nomis”, which stands for
household management in its’ literal terms.1

But the ever transient forms of economic barely let it be constricted in water-tight compartments
barring several stages and process through many changes so as to let personnel and the economy
on the whole develop into such a developed and mammoth structure that it is today.

The stage of my topic that concerns is an important tool in the study of the modern economics
with the stress laid and focus placed upon the modern trends in the development of the economic
structure and its’ reverence on the lives of million individuals and on the life of the economic
system as the whole.

Before coming into my topics, let us visit through the subsequent stages through which
economics had placed itself in today’s modern world so as to be placed in its’ moderns self
today:

1. Moral Philosophy – Economics is the study of right and wrong, good and evil, better
and worse. These polarities cannot be translated into quantitative and measurable terms
and, for that reason, it is sometimes discredited as lacking scientific objectivity. And it is
not, in fact, a science in the sense that mathematics, chemistry, and physics are sciences. 2
2. Political Economy- The study of Economics provides insights into decision-making,
market outcomes and the functioning of the overall economy. By combining coursework
in Economics and Political Science, students gain an interdisciplinary perspective
important to understanding both political and economic issues3.
3. Neoclassical Economics - Neoclassicaleconomics is an approach to economics focusing
on the determination of goods, outputs, and income distributions in markets
through supply and demand. This determination is often mediated through a hypothesized
maximization of utility by income-constrained individuals and of profits by firms facing

1
Adam Smith, An Enquiry into the nature and growth of wealth of antions, 1776
2
This view is typically possessed by the classical economists like Adam Smith and David Ricardo.
3
Karl Marx, The Communist Manifesto, 1848

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 production costs and employing available information and factors of production, in
accordance with rational choice theory.4
4. Modern Economics  - Economics focuses on the behaviour and interactions
of economic agents and how economies work. Microeconomics analyzes basic elements
in the economy, including individual agents and markets, their interactions, and the
outcomes of interactions. Individual agents may include, for example, households, firms,
buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated
production, consumption, savings, and investment) and issues affecting it, including
unemployment of resources (labour, capital, and land), inflation, economic growth, and
the public policies that address these issues (monetary, fiscal, and other policies). 

Pillars of Economics
In the modern day context, Economics can be easily divided into a set of modern economic
activities where people tend to perform certain activities as to be required for the proper
allocation of scarce economic resources in order to maximize satisfaction with the
resources having alternative uses.
Let us have a look at the followings essentials of the economics-
1. Production –Economic Production is an activity carried out under the control and
responsibility of an institutional unit that uses inputs of labour, capital, and goods and
services to produce outputs of goods or services.5
2. Consumption- Neoclassical (mainstream) economists generally consider consumption to be
the final purpose of economic activity, and thus the level of consumption per person is
viewed as a central measure of an economy’s productive success. Consumption,
in economics, the use of goods and services by household.6
3. Investment- In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. In finance, an investment is a
monetary asset purchased with the idea that the asset will provide income in the future or will
later be sold at a higher price for a profit.7
4
Alfred Marshall, The Principles of Economics, 1890 is the propounder of the theory.
5
https://stats.oecd.org/glossary/detail.asp
6
https://www.britannica.com/topic/consumption
7
https://www.investopedia.com/terms/i/investment.asp

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4. Distribution- In economics, distribution is the way total output, income, or wealth is
distributed among individuals or among the factors of production (such as labour, land,
and capital In general theory and the national income and product accounts each unit of
output corresponds to a unit of income.8
5. Exchange- An exchange is a marketplace in which securities, commodities, derivatives and
other financial instruments are traded. The core function of an exchange is to ensure fair and
orderly trading and the efficient dissemination of price information for any securities trading
on that exchange.9
At this structure, the most important term and feature in today’s modern day life context is
basically the definition and explanation of the term “market”
So, for subsequent advent of our topic , it is highly important to know and understand the nature
and types of markets, to define the term “market”. The further elaboration may be made
definitely on the aspect of markets from a subjective aspect, as to be further on to press
down on to the feature of a typical market as per the convenience.
Let us now look at the types of the markets.

Meaning and types of Markets

A market is one of the many varieties of systems, institutions, procedures, social relations and
infrastructures whereby parties engage in exchange. While parties may exchange goods and
services by barter, most markets rely on sellers offering their goods or services (including labor)
in exchange for money from buyers.10

But, in terms of modern complexity and nature of growth , market can be divided into a number
of measures to be taken care of and a lot of features can be grounded to be taken as a basis to
divide the markets11-

1. Degree of control- whether it is absolute, partial or nil.

2. Nature of Products – Perfect substitutes, close substitutes or differentiated.
3. Knowledge- Perfect knowledge, or imperfect knowledge.
8
https://en.wikipedia.org/wiki/Distribution_(economics)
9
https://www.investopedia.com/terms/e/exchange.asp
10
Joseph E. Stiglitz , Economics, Norton Publications, Tenth Edition, 1998, Pg. 35
11
Karl and Fair, Principles of Economics, Sixth Edition, Pearson, pg-150

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 4. Mobility of Factors- whether the factors of production are perfectly mobile, immobile or
partially mobile
5. Extent of Competition- Whether free competition or stiff competition or restricted
competition, to be guarded of against as the case might be.

As to be based upon on the basis of the aforesaid factors, a market structure can be divided into a
number of external and superficial types which may not be apparently visible, yet ay be operative
from below, or yet might be too glaring to observe in a present day scenario.

Let us now discuss them in details-

1. Perfect Competition - Pure or perfect competition is a theoretical market structure in

which the following criteria are met: all firms sell an identical product (the product is a
"commodity" or "homogeneous"); all firms are price takers (they cannot influence the
market price of their product); market share has no influence on price; buyers have
complete or "perfect" information – in the past, present and future – about the product
being sold and the prices charged by each firm; resources such as labor are perfectly
mobile; and firms can enter or exit the market without cost12.Eg- a vegetable market.
2. Monopoly-A market structure characterized by a single seller, selling a unique product in
the market. In a monopoly market, the seller faces no competition, as he is the sole seller
of goods with no close substitute. In a monopoly market, factors like government license,
ownership of resources, copyright and patent and high starting cost make an entity a
single seller of goods. All these factors restrict the entry of other sellers in the market.
Monopolies also possess some information that is not known to other sellers.13Eg- Indian
Railways.
3. Monopolistic Competition-Monopolistic competition is a type of imperfect
competition such that many producers sell products that are differentiated from one
another (e.g. by branding or quality) and hence are not perfect substitutes.. In
monopolistic competition, a firm takes the prices charged by its rivals as given and
ignores the impact of its own prices on the prices of other firms. In the presence of
coercive government, monopolistic competition will fall into government-granted

12
Investopedia, MacMilan Publications, Pg-126
13
Amos Witztum, An Application of Economics, Oxford,1996, pg-120

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 monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of
monopolistic competition are often used to model industries. Textbook examples of
industries with market structures similar to monopolistic competition
include restaurants, cereal, clothing, shoes, and service industries in large cities. The
"founding father" of the theory of monopolistic competition is Edward
HastingsChamberlin, who wrote a pioneering book on the subject, Theory of
Monopolistic Competition (1933). Joan Robinson published a book The Economics of
Imperfect Competition with a comparable theme of distinguishing perfect from imperfect
competition
4. Oligopoly- An oligopoly is a market structure in which a few firms dominate. When a
market is shared between a few firms, it is said to be highly concentrated. Although only
a few firms dominate, it is possible that many small firms may also operate in the market.
Although only a few firms dominate, it is possible that many small firms may also operate in the
market. For example, major airlines like British Airways (BA) and Air France operate
their routes with only a few close competitors, but there are also many small airlines
catering for the holidaymaker or offering specialist services. Similarly, while the 'Big Six'
energy suppliers dominate the UK market, with a combined market share of 78% for
electricity supply, there are currently 54 active suppliers.14

Now, coming on and talking about the recent modern trends in the market economy, let us now
focus basically upon the market structure which is most visible and important in the realm of
discussing the given project topic- Monopolistic Competition.

The detailed structure and basis of such classification would take place only after detailed study
and analysis of the monopolistic competition and make further observations of the detailed
changes and features so as to determine how basically the monopolistic competition market plays
such a key role in the mode of determining the welfare of people and of the entire economy on
the whole as a large system.

After all, presently it is the most vibrant and dominant types of market system!

14
2017 Data, as per London Directory.

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Monopolistic Competition

Robert Chamberlain, in his 1933 book, The Theory of Monopolistic Competition, first
exclusively gave the concept of the form of market which is to be called as Monopolistic
Competition.15

He systematically gave the concept where the firms would sell the goods which would be close
substitutes of one another with the difference in the form of brand or equity so that it may
affect the individual preferences and allow the individual seller to exercise some partial
control on the market price and let a situation of stiff competition follow, with both of it
adverse and positive effects.

Let us now look at the features of monopolistic competition-

Features

1. Large Number of Buyers and Sellers:

There are large number of firms but not as large as under perfect competition.
That means each firm can control its price-output policy to some extent. It is assumed that any
price-output policy of a firm will not get reaction from other firms that means each firm follows
the independent price policy. If a firm reduces its price, the gains in sales will be slightly spread
over many of its rivals so that the extent to which each of the rival firms suffers will be very
small. Thus these rival firms will have no reason to react16.

2. Free Entry and Exit of Firms:

Like perfect competition, under monopolistic competition also, the firms can enter or exit freely.
The firms will enter when the existing firms are making super-normal profits. With the entry of
new firms, the supply would increase which would reduce the price and hence the existing firms
will be left only with normal profits. Similarly, if the existing firms are sustaining losses, some

15
But, earlier, people like Adam Smith and Alfred Marshall has spoken about it too.
16
To be regarded as true for perfect competition also

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of the marginal firms will exit. It will reduce the supply due to which price would rise and the
existing firms will be left only with normal profit.17

3. Product Differentiation:
Another feature of the monopolistic competition is the product differentiation. Product
differentiation refers to a situation when the buyers of the product differentiate the product with
other. Basically, the products of different firms are not altogether different; they are slightly
different from others. Although each firm producing differentiated product has the monopoly of
its own product, yet he has to face the competition. This product differentiation may be real or
imaginary. Real differences are like design, material used, skill etc. whereas imaginary
differences are through advertising, trade mark and so on.18

4. Selling Cost:
Another feature of the monopolistic competition is that every firm tries to promote its product by
different types of expenditures. Advertisement is the most important constituent of the selling
cost which affects demand as well as cost of the product. The main purpose of the monopolist is
to earn maximum profits; therefore, he adjusts this type of expenditure accordingly

5. Lack of Perfect Knowledge

The buyers and sellers do not have perfect knowledge of the market. There are innumerable
products each being a close substitute of the other. The buyers do not know about all these
products, their qualities and prices. Therefore, so many buyers purchase a product out of a few
varieties which are offered for sale near the home. Sometimes a buyer knows about a particular
commodity where it is available at low price. But he is unable to go there due to lack of time or
he is too lethargic to go or he is unable to find proper conveyance. Likewise, the seller does not
know the exact preference of buyers and is, therefore, unable to get advantage out of the
situation.

17
Only feasible in long run(Infra) , not in short run(Infra)
18
(chamberlain, 1933)

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6. Less Mobility:
Under monopolistic competition both the factors of production as well as goods and services are
not perfectly mobile.19

7. More Elastic Demand:

Under monopolistic competition, demand curve is more elastic. In order to sell more, the firms
must reduce its price.

The following features made it very clear about the features of monopolistic competition, and
now let us narrow down upon our specific feature i.e.-the Product Differentiation and to
discuss it in details the various implications that it would present out in details.

Product Differentiation

Monopolistic competition has become an effective trend in market economy structure nowadays
and the sole and key feature of it is product differentiation.

Let us now understand and analyze product differentiation in both of its’ lexical and technical
understanding and meaning.

In technical terms, product differentiation can be simply termed as “ slight but not overwhelming
difference in the product quality, colour, shape and size”. It is a feature typical and innate to only
a form of market where the goods or services that is being produced is a similar in nature, but the
intrinsic difference of the goods/services lies basically in the fact that each one tries to surprises
another through the virtue of something imperceptible, the innate feature of being slightly well
packaged or promoted or well-placed among the virtue of others.

19
Pierce Winstel, 1954, The modern Philosophy of Economics, MacMilan Bros., Pg-34

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Sometimes, this might lead the firms to opt for something subtle, which might be in the form of
a better brand ambassador or a different flavor or simply a slight price discount.20

Case Example

Suppose place yourself as a consumer in the Indian market context, where you have a specific
preference towards any particular brand, let it be Pepsodentfor that record. Now, suppose
someone asks you the reason for it, what could be your possible explanation for it?

1. It has a slight intrinsic flavor that suits my taste.

2. It has the best customer service among all the brands concerned.

3. It has a better pricing policy that most of the other available alternatives.

4. It has the best brand value among all the concerned brands.

5. It has the celebrity brand ambassador whom I endure the most.

6. It has the best packaging facility in the industry.

7. It has the best after sales service to offer.

8. It has the most widely reached and widely distributed sales channel

These are the most widely accepted reasons and causal explanations that one would give up. But,
on the still and rise,it would never leap up to certain explanations as follows-

1. It is the only product available.

2. It sells goods much cheaper than others.

3. It has unparalleled product features among all the brands available.

20
This tendancy is likely to grow further among countries with scarce economic resources.

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Now if analyze the case study very carefully, we might lead to our desired conclusion, which
says that the most possible reason to buy for a good in a monopolistic competition is nothing but
a nature of product differentiation and the basic facts that negate the feature is that it is not a
typical feature of any other form of market for as such, like in a monopoly or a perfect
competition or an oligopoly even, but rests solely with a form of market like as monopolistic
competition.

Some examples of modern product differentiation may be cited as below-

1. Cadbury provides its’ chocolates with better packets with animated pictures to compete
against Nestle, Amul, Ferrero and Mars, among others.

2. Reebok tries to hire a more-renowned superstar to promote its’ product against the onset
and competition of other companies Adidas , Nike, Puma etc

3. Lux introduces a newly flavored jasmine soap to compete against Dove, Rexona, Hamam
amongst others.

4. Lee introduces a new Formatted T-shirt to compete against the other producers such as
Reebok ,Hoffman, ColorPlus etc.

5. KFC introduces a regional specialty Veg Burger in order to compete against the rivals
MacDomalds, Subway etc.

6. SCC gives a 30-day free trial unlike the other law journals like Blacks ,LexisNexis etc

Product Differentiation effects on firms

Product differentiation is essential in today's financial climate. It allows the seller to contrast its
own product with competing products in the market and emphasize the unique aspects that make

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its product superior. When utilized successfully, sellers gain a competitive advantage by
demonstrating why their products are unique.21

Standing Out

A company can set itself apart from the competition in two ways: through cost leadership or
through product differentiation. Cost leadership emphasizes saving money and appeals to those
who are on a budget. Product differentiation focuses on providing quality.

With so many new products hitting the market, it is important for companies to stand out in
terms of quality. Consumers want to know that what they are purchasing will last and be useful.

Brand Loyalty

A good product differentiation strategy may gain brand loyalty, which is paramount to any
successful business. This strategy focuses on a buyer's perception of value. As long as the seller
continues to provide high quality, the customer base will remain strong.

Today's financial climate contains businesses in an intensely competitive market. If a product

does not have consistently high quality, consumers will turn to competitors. Creating a product
that is unique will not be enough to gain the competitive advantage of product differentiation if
the buyer does not value what the seller is differentiating on.

The seller must have a thorough understanding of the buyer's expectations and how the product
will be used. For example, a car's purpose is for transportation, but if it also provides a feeling of
accomplishment and self-worth, then the seller will have a competitive advantage over cars that
are more basic.

Accept No Substitutes

Another way product differentiation is so important is it contributes to the buyer's perception of

no substitute being available. Product differentiation will highlight the areas that set it apart, and

21
J.M. Keynes , The theory of market structure, 1930

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consumers will perceive that other similar products do not meet their needs. It raises their
expectations about the quality standards they are willing to accept.

These may be said to form the basic standing grounds on which the strategy of product
differentiation is taken up by monopolistic firms.

The Price Theory Aspect

Now , let us consider the important motive and aspect onto the effect why the producers would
opt for it, and the most visible and reasonable explanation to be cited along with is the tendancy
and ability of the firms to control the market prices.

This tendency of the monopolistic firms were first cited by Lord Chamberlain in his book The
Monopolistic Competition (1933) and he explained it to explain the behavior of firms in this
case.

But, let us now understand , in what situation, would the firms would be able to influence the
market situation-

1. In a situation where the firm is there to restrict output and supply, and thereby create
artificial excess demand and thereby would be able to rise the market price of the goods
2. A firm can promote brand loyalty on the basis of excessive promotion , and the market
value or sell value would rise and give away to a consumers’ preferences.

Now, a monopolistic firm tries to build upon and work on this given theory itself, to form a basis
of Price Control22.

How are the prices even controlled?

In order to understand the given price mechanism ,we must understand the types of price control
and mechanism that works in a given economy , which can be broadly classified as –

22
Refers to a mechanism of price determination by subsequent firms.

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 1. Full Price Control23- A monopoly has absolute market power, and thereby can set
a monopoly price that will be above the firm's marginal (economic) cost, which is the
change in total (economic) cost due to one additional unit produced. A monopoly form of
market can have and exercise this absolute power on the simple basis that it can sole
control on the output and promotion strategy on the market and can solely decide on its
basis.
2. Partial Price Control- This basically states that the firms in monopolistic competition
can barely be allowed to have complete control on the prices, but it would rather go on
for a partial pricing policy, which can be further bifurcated into subsequent categories-

1 - There is a wide presence of close substitutes in the market, so a steep change in the
price would adversely affect the firm’s demand and profit structure.

2- The goods in the market are said to be close substitutes and not to be said as perfect
substitutes so the totality effect on firm’s production would surely render a negative
impact on the firm’s demand and cost structure.

Now let’s examine the state of monopolistic competition in terms of its’ effect in pricing.

Effect on the market price as because of product differentiation

The Average Revenue curve of a firm is basically known as the ‘Price Line’ of the firm. This
line basically shows how elastic or responsive , the demand of the market is in response to the
changes in the price fluctuations of the product, whereby the pricing policy or strategy of the
firm is also made clear . The curve basically shows how much “elastic” the demand of the
product is, and the AR also tells the firm and the consumers how well there is “adjustability” of
the firm and market in respect of the changes and fluctuations of the price.

AR is basically the formulation of, the per unit revenue earned of the firm. This can be further
supported as of,

23
To be distinct in case of monopolies.

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Average Revenue= Total Revenue/ Quantity sold.

So, basically the graphical representation can be very well suited out as , the relation explaining
between the Quantity sold and the Average Price24.

The following features of the AR curve can be very well pointed out as of now-

1. Downward Sloping- Lord Chamberlain in his book pointed it out very well that, in a
monopolistic competition , the AR curve has to be a downward sloping one, as in order to
sell more, the firms would definitely have to lower the price down. The reasons for this –

a. Law of Deamnd- The basic premise for this can be stated out as the law of demand
as it states that "conditional on all else being equal, as the price of
a good increases (↑), quantity demanded decreases (↓); conversely, as the price of a
good decreases (↓), quantity demanded increases (↑)".
b. Close Substitues- Although there is product differentiation in the market, the goods
are most and merely close substitutes and not perfect ones, so just banking upon
proper reputation and brand loyalty won’t serve the purpose or do much good, they
have to lower their price down to reach out to the most of the customers, to induce
them to forego others’ products and opt out for the products of their firm.

2. Flatter in nature - The demand curve or the AR curve of the firm has to be flatter in
nature, which basically shows that the demand of the firm in this respect elastic in
nature, which demonstrates that there is a presence of lot many substitutes in the market
and there prevails a situation of stiff close competition , where the buyers have a lot many
options for them to exercise, and can easily adjust and change their demands to suit their
needs.

This situation can best be explained in terms of the nature of the demand curve of the firm in
its graphical representation

24
Stated by Bobbes, in form of his article based on Law of Demand

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 Average revenue curve of a monopolistic firm25

Long run and short run effects

Short run can be said as a stage where the factors of production can’t be changed or altered upon,
and neither the buyer nor the seller feels free to adjust oneself to this changing environment
status , and fails to adjust either the purchasing power or the firm’s pricing policy.

Long run refers to a situation , where both the firms and sellers feel free to adjust their
purchasing power, and the factors of production become variable and the buyers purchasing
power or pocket gets adjusted too.

The feature of product differentiation has varied degree of utility and protection in the eyes of
the sellers and buyers alike, that would be discussed upon subsequently , in the operation of the
buyers and sellers.

25
www.sparknotes.com

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For the buyers in a monopolistic competitive market, in the short run and long run, there are
varied effects on their purchasing power, whereas for the sellers, there is an effect on their firm’s
pricing policy.26

In order to understand this, we need to specifically focus on the nature of the working of the
buyers and sellers in the short run and long run also, so as to focus how do they change their
elasticity to purchase in the run of these periods itself.

Effects on firm’s revenue due to product differentiation

The firm has to bear down the case of competition and costs in order to maximize its’ revenue in
the light of product differentiation. In order to enable this, the firm has to keep in mind the
following factors to influence and constitute a better pricing policy-

1. It has to increase it’s expenditure on the Research and Development wing of the
company so as to ensure a proper working and functioning of the company, and keep the
products out of the ambit of the personnel involved, so as to ensure a cutting edge and
similar manipulations on its products to give them an upper hand in comparison to what
their competitors have to bear.
2. In order to ensure this, the firms have to spend more on the Research and Development
wing. But the process of discovery and development of innovations embodies
uncertainty and heterogeneity, which makes its structural analysis extremely
complex.27 In order to sustain this process, the firms have to increase their costs and this
would ultimately lead to a fall in the revenue, as firms would definitely face a paucity of
funds in future with barely anything to spend on selling and distribution , and ultimately
running out of the competition.28
3. Due to stiff cut throat competition, the firms have to incur a lot of expenditure on the
promotional and advertisement aspects, so as to make its products stand out from and of
the rest of the others,and to provide incentive to the sellers and buyers and the
stakeholders to ensure proper continuity of the selling effects and the market

26
To be studied along with the concept of “welfare economics”
27
“Inadvertant effect” of Product Differentiation as stated down by R.Chamberlain.
28
Inherent reason for the growth of Research and Development departments in all firms

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 phenomenon. This would ultimately lead to a drain of funds from the firms and leading
to adverse effects on the firm’s total revenue as the firm would not be able to maintain its
proximity on the market standing even any further,

In the short run, the firms may be able to bear down upon the increasing tussle between the
“competition costs” and “ Research and Development costs” engaging upon it, but ultimately
it has to bear down upon the inadvertent fall of market economies and the crumbling effect of the
market allows it to succumb down and have a leap down on its revenue and costs structure.

So, as to conclude, we might set upon that the feature of product differentiation as a double-
edged sword, where we would have to focus upon and the basic of both its adversities and
positivity in the short run, where either one of them would be overpowering the others in the
long run, bearing down a negative effect on the overall revenue ad cost structure of the firm’s
approach and structure.

The only way to escape from this is to strike out an effective balance between these two
marginalized expenditure, and this has to borne down heavily through the issues of proper
resource allocation and finance management.

Short Run

In such a situation, a firm can experience, either of a supernormal profit or of a subnormal loss,
as a firm is unable to adjust itself in the changing trends of the market, and so basically, the
trends or driving forces of the market itself determines the nature and state of the revenue , and
its’ profitability.

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In a short, with factors being inelastic, the firm can barely focus down upon on the shifting or
changing trends, and so, the revenue and cost curves, both are steeper in nature , and so a
firm, with enjoying the benefits of the opening craze and market driven force of the economy,
would bare down upon as a profit earning venture.

But, it is not always the case, there might be a few other reasons, which might adversely affect
the profitability of the firms, to be listed down upon as-

1. Huge sunk cost- Some firms might tend to incur a lot of unrecoverable costs in the
forms of survey, public opinions,. which becomes impossible too recover in the short run.
2. Huge Advertisement Cost- In a market of cut throat competition, the firms may incur
huge advertisement costs , and that would bear upon them in form of irrcoverabel funds,
especially if they are suffering from paucity of funds, and would invariably hinder their
growth.
3. Lack of a brand value- In the absence of a brand value, a firm might face some severe
difficulties to promote the products on proper generic lines, and for this reason, might
incur down some losses in the initial stage which it fails to recover further.

Long Run
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 In the long run, the firm increases its’ suitability and adjustability with the ongoing
changes in the matter trend and the revenue curve of the firm takes an elastic shape or
becomes flatter in nature, and here the firm basically earns profit or loss on the sheer
basis of their product loyalty or quality, which results out from an offshooting effect from
the basic feature of product differentiation.

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In the long run of the firm, there is only normal profits , which basically refers to a situation
where a firm is able to earn only accounting profits and no economic profits, and is barely to able
to keep his feet off the grounds, with earning bare minimum returns on capital, and is not in a
situation to further develop up on the Research and Development wing of the Firm, and also not
in a position to dominate the market force over others. This gives rise to a “Status quo” position
in the market which basically focuses on a more distill state of market, where brand value,
matters than almost any other case in the market.

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For instance, if we focus on the modern day trend of the market, it’s basically upon the brand
value or loyalty, dating since times immemorial that our choices and preferences are driven
away, for instance , a person may prefer a Vimal shirt over a Raymonds one on the simple basic
tool that this particular brand prejudiced him-and nothing else!

Implications of Product Differentiation

Product differentiation has become an inevitable aspect of modern day monopolistic competition
market form and structure and it leads to a lot of important phenomenon and applications on its’
basis.

Some of them to be listed as follows are-

1. High substitution effect – Due to the fact that goods are close substitutes of one another,
there is a high substitution effect in the goods, where the use of one can easily be
substituted or compensated by the use of another, and so thereby increases the availability
and accessibility of various options to the consumer.

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2. Negligible income effect- As the goods are basically the close substitutes of one another,
there is basically no or negligible income effect to be perceived upon , as the consumer is

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 generally indifferent between the two goods, and a shift or change in income barely

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affects the another.

3. High cross elasticity of demand- As the goods are basically the close substitutes of one
another,they exhibit a high cross elasticity of price where one’s demand adversely and
inadvertently affecting the demand for another.

Criticism of Product Differentiation

Under a heading entitled “Criticisms of the Theory of Monopolistic Competition” in Edwin

Mansfield’s Microeconomics: Theory and Applications, Mansfield introduces “a number of
important criticisms” made of Chamberlin’s theory, mostly those made by (the previously cited
Nobel prize winner) George Stigler.Mansfield goes on to reaffirm Stigler’s view that the
assumption of similar demand and cost curves for all firms in the group must mean that the
products sold by these firms are homogeneous. His only argument against this view is the weak
case declaring that if the products are homogeneous, the firms’ demand curves wouldn’t need to
always slope downward. Both writers may have been too focused on technicalities to appreciate
Chamberlin’s larger theory. Chamberlin assumed similar demand and cost curves for each firm,
which Stigler and Mansfield find impossible when applied to a market for differentiated
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products. However, given some easily achievable conditions, those demand and cost curves
could be perfectly alike for all firms in real life:

• (1) Long-run equilibrium price has been achieved in all industries whose services or
products are necessary inputs for the kind of product produced by the monopolistically
competitive market. This can be achieved in the short run if those inputs are all produced
by monopolies.

• (2) All consumers considered in the demand curves are individuals who will buy at least the
market’s equilibrium quantity of the products offered by the market, regardless of its cost or
quality; so typical competition against other firms is the only way a firm can influence whether
those consumers buy x quantity from them.While demand curves tend to be more complicated
issues, as no linear equation can account for the unavoidable erraticism of real people, the two
complicated demand curves of monopolistic competition can be simplified using the trick often
presented to beginning economics students: converting an entire base of potential customers to a
single, “average” consumer. When we reconsider the market through the eyes of that one
representative consumer, it is easier to see how easily (2) can be achieved.The only legitimate
factor differentiating monopolistic competition from perfect competition is perfect competition’s
homogeneity of products. Perfect competition is implausible, but imperfect—or monopolistic—
competition is the ideal market structure that has already been implemented in most electronic
and/or artistic markets. The “theory of monopolistic competition” is, like that of evolution,
not “just a theory”; it is, rather, a theoretical fact as well as the current term for the goal of
classical capitalism. Imagine a market structure in which businesses compete to sell
products and, in addition to lowering prices, they also alter the quality of their products
(which, due to perfect homogeneity, could not be done in a perfectly competitive market).
As a result, consumers may buy products which are better as well as cheaper. Opposition
to that utopian theory is usually unheard of.

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 Comparative study of two monopolistic firms

Here, a classic comparison would be done between two of the most important sectors in
the monopolistic competition industry and the Average Revenue curve of two prominent
firms in a monopolistic market structure and base the conclusions on the sheer merit of
product differentiation, where only the quality of a product , affects and supersedes the
sale and revenue of another.

The two firms taken in for consideration may be taken in for as Reebok and Nike, and let
there be ensured two way process and theory of its’ bea

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As revealed by the graph, Nike is earning Normal Profits, where it is expected to earn only
economic profits and not accounting profits, whereas , it is expected of Reebok to earn Short
Term Losses and this is falling down badly upon the nature of the working and growth of the
firms structure.

The possible reason to be cited along this can only be said as, “Product Differentiation”, where
it is highly expcted of the firm’s failure or relative success, to be attributed to any of the reasons-

1. Better variants in shape, size or colour.

2. Better product packaging.
3. Better product promotion.
4. Better afetr sales service.
5. Better brand value.
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 So, it seems clear that only the product differentiation created a value based change in it,
owing to the difference in profitability, keeping all other factors to be same.

Conclusion

Product Differentiation has turned to be the single most dominant market of the present modern
day . It has nearly circumvented all the spheres and industries of life- from a simple vegetable
market to a complex toothpaste industry, with barely minimum any exceptions.

The most distinguishing feature of the market itself can be said about to be as the feature of
Product Differentiation , which basically determines the mode and orientation of the market
itself, which determining the various purchasing baskets of the consumers and the expenditure
policy of the firms.

On a basic orientation purpose, the researcher feels that the feature of product differentiation is
essential for the basic purpose of functioning and its’ worth in a market, the feature can be
served as an impediment to the various growth and off-shooting of the various nature of acts
done, and has to be perceived against and in for a purpose in the long run.

So, there has to be established a “win-win” situation, where each consumer gets his worth of a
rupee and maximizes his or her satisfaction and the producers get to maximize their profits, by
ensuring optimum utilization of resources and going together hand in hand for a better market
future.

Suggestions

1. To ensure proper regulation and ensure transparency in the working of the proper market
structure.
2. To ensure a proper structured statutory provision in the working of the market structure.
3. To make customers aware of their rights and sellers aware of their duties in the
performance of the various market functions.

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 Bibliography

1. Robert Chamberlain, The Monopolistic Competition, 1933, Edition-I, MacMilan

Publications.
2. Steven Brackman, The Theory of Origin of Monopolistic Competition,1998, Semantic
Scholar Pub., pg-22-34.
3. E H Chamberlain, The Theory Of Retrospection of monopolistic competition, 2014,
Scholarlyworld Press Co., pg- 112-130.
4. V.K.Ohri, Microeconomics Class 12, VK Global Publications, Pg-238-255.
5. NCERT, Class 12 Microeconomics, Pg- 120-135.
6. www.jstor.com
7. www.sparknotes.com
8. www.reebokinfo.com
9. www.nike.com

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