Monopolistic competition - Assignment Example

Monopolistic competition Firms in monopolistic competition can differentiate their products in different ways. Differentiation can be real (when companies produce products with physical characteristics, which are different from competitors products; suggest more suitable locations of products sale for their customers, use other raw materials for products production or different packages; offer additional attendant services and products for the customers of the products) and perceived (when companies use advertising to make the customer believe that a product has some additional or better features, compared to any other product, produced by a competitor).

Differentiation can help a company to create a market niche and set a price for a product, which will exceed its marginal costs, and thus will help a company to increase its economic profit in the short-run period (Mankiw, 2011).Product differentiation is considered to be one of the barriers for companies to market entry, as they will have to win the loyalty of the customers to a certain product. However, differentiation in monopolistic competition is not so significant and cannot exclude other products as substitutes (Mankiw, 2011).

One of the examples of a company in monopolistic competition is Reed’s Dairy – a farm, which produces dairy products in Idaho Falls, Idaho. Reed’s Dairy used differentiation as a strategy to gain customers loyalty, get additional market niche and increase its profit. Real differentiation was used by Reed’s Dairy, as the farm started to produce hormone free milk and other dairy products. Besides the company offered its customers ice-cream, produced directly at the farm. Reed’s Dairy also used perceived differentiation, as it advertised its products as the best, delicious and most fresh.

The company uses its website, facebook page and other means to advertise themselves and communicate with the customers (Reed’s Dairy). ReferencesMankiw, N. G. (2011). Principles of Microeconomics. Boston: Cengage Learning. Reed’s Dairy. (n.d.). Retrieved from http://www.reedsicecream.com/ Reed’s Dairy. (n.d.). Retrieved from https://www.facebook.com/ReedsDairy/info?tab=overview