BRAC University Name Ahmed Sadman Haider

MBA Programme Section 02

ID 21364056
Summer 2021 The Candidate is aware that a plagiarism
ECO 501: Managerial Economics check will be made and an oral
assessment may follow.
Sections: 1 & 2
Assignment 2
INSTRUCTIONS. PLEASE READ CAREFULLY

1. There are TWO pages in this Script: Page 1/2 and Page 2/2
2. Distribution Date: SATAug 14, 2021
3. Submission Date: 6pm, FRIAug 20, 2021
4. Submission Platform: Google Classroom or Email: ext.asrarul.islam@bracu.net
5. Submission Format: Word or PDF
6. File Name Format:
Sec 1- ID- Assign 2- Name. EG:Sec 1- 20260000- Assign 2- Azam Khan
Sec 2- ID- Assign 2- Name. EG:Sec 2- 20267777- Assign 2- AyubBachchu
7. Name, Section, ID have to be mentioned clearly in the above box
8. The script shall be checked for plagiarism
9. The candidate may be assessed orally, which will be counted as an Assignment
10. Try to think on your own
11. Good Luck

QUE: Identify two factors that give a firm, market power under monopolistic
competition. How do these factors give market power? Discuss in the context of a real
world example. HINT: Your analytical ability will determine your grade.
YOU MAY WRITE FROM BENEATH THIS LINE
YOU CANNOT EXCEED PAGE 2/2

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From my understanding monopolistic competition is a mixture of perfect competition (which is a theoretical state)
and monopoly. Perfect competition in a sense that there are large enough sellers in the market so no individual has
the authority that can affect the overall market. There is also free entry and exit, so firms doesn’t find substantial
barrier to enter or depart from the market. But moving in the direction of monopoly, the monopolistic competitors
product is differentiated. Because of such traits, products in the market are not perfect substitute of each other.
Differentiated products give a monopolistic firm a slight amount of control on price that it can charge. An example
of monopolistic competition can be: There are many toothbrushes in the market, but the one with a comfortable
rubber grip will appeal a consumer in comparison with other toothbrushes, so the seller can slightly increase the
price but not much as the consumer might go for a cheaper alternative. According to the concept of monopolistic
competition, I think there are two factors that give firm market power under this fierce competition, they are: non-
pricing strategies and taking advantage/manipulation of information.

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Non-Pricing strategies: As mentioned in the beginning, under monopolistic competition different firms sells highly
differentiated products so to have market power over other competitors, a firm have to rely on producing good
quality of products, provide good customer care, take advantage on geography, and innovation. There are two sub-
factors that affect a consumer’s decision: If a firm provides good customer service, artificial differentiated product
(like the rubber grip example of a toothbrush) and if that firm is the only source of buying products in the
consumer’s locality. There are some examples that can describe the non pricing strategies: In Dhaka city we see
several super shops which sell the same products to the consumers and among them there are some familiar names
like Agora, Meena and Shopno. Among these three mentioned names; Shopno has the most outlets covering every
part of Dhaka city in comparison with the other two. So a consumer living in any area has easy access to buy
groceries from Shopno. Not to mention they provide good customer service and provides membership cards offering
discounts on purchase which attracts consumer to choose and recommend Shopno over other super shops. Another
interesting example is that, in Cities we see the dominance of Apple, Sumsung and Xiomi in smart phone sector.
Even though there are low barrier for smaller brand like Itel to enter competition yet it cannot sustain operation in
the cities. So they take advantage of geography by supplying smart phones in the rural areas where the popular
brands doesn’t have any outlet. They also have the authority set and raise the price of the phone slightly. Apart from
providing good customer service or coming up with innovative ideas to sell differentiated product, we see the trend
of merging. Amazon started its journey as an online marketplace for buying books yet now they are leading e-
commerce in the world today and they made it possible by offering small firms to merge with them to sell
commodities online under Amazon’s brand.

Manipulation of information: In perfect competition, a consumer is able to gather information easily as all
products are the same, but in monopolistic competition there many firms offering the same differentiated products.
Perfect information doesn’t exist here. Thus information gathering for consumers becomes time consuming and
firms take advantage of it. To sell their products, firms invest heavily on advertisement, celebrity endorsement and
lucrative packaging that can influence consumer’s decision to buy their product, even though there are similar
products in the market. An easy example is: Head and Shoulder, Clinic all clear men are the same shampoo, but a
consumer who idolizes Cristiano Ronaldo will see his picture on Clinic all clear’ shampoo packaging and will
definitely buy their product. He/she will not go through the hassle of gathering information on which shampoo is the
best. Same goes for other products. If Shakib Al Hasan or Tamim Iqbal promotes Ice Cream, food app the fans will
be inclined to use that product. Another case study of information manipulation can be Lionel Messi’s transfer from
Barcelona to PSG. His name and number made PSG kit more desirable to buy even though the quality of the cloth is
similar to other kit in the market. Brand loyalty/Brand recognition is also a factor where the consumer has complete
faith over the name of brand. If I go buy a laptop in computer store, there may be ASUS, Acer’s laptop which can be
cheap, but my psychology will push me to buy a branded laptop like HP or DELL because I know simply name of
the brand assures me the quality of the product and I will not mind overpaying slightly. Same goes for longtime
Apple and Samsung users. This multiple cases clearly depicts how proper packaging, celebrity’s endorsement and
up to date brand advertising can manipulate information of a differentiated product resulting in influencing
consumer’s behavior.

From the above discussion we see, monopolistic competition is very intense because of low barrier for firms to
enter/exit, firms selling differentiated products. Also in monopolistic competition firms can set the price but cannot
solely control or influence the entire market. Even with limitations and restriction, a firm can still achieve market
power through adapting non-pricing strategies and manipulation of imperfect information to influence customer’s
decision to buy their products and establish a strong presence/dominance under monopolistic competition. Through
these procedures firms can produce excess amount of economic profit in the short run However, because barriers to
entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic
profit is zero. Also Economists who study monopolistic competition often highlight the social cost of this type of
market structure. Firms in monopolistic competition expend large amounts real resources on advertising and other
forms of marketing. As discussed it can influence consumer behavior but, if the advertised product is actually near
perfect substitutes, which is likely in monopolistic competition, then real resources spent on advertising and
marketing represent a kind of wasteful. This produces a deadweight loss to the firm and bears the risk of leaving this
highly competitive market.

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