Business Strategy: Monopolistic Strategies

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The best way to analyze a business strategy is to have complete knowledge of the markets in which it is being applied. A producer should know whether his strategy will reap under a perfectly competitive market, monopoly or a monopolistic competition. Product differentiation is always a good idea as it provides the producer with a slight edge over the competitors hence increasing his profit margins. Generally product differentiation is mostly effective in a monopolistic competitive market. First we need to understand what is monopolistic competition and how does a firm operate under a monopolistic competition. What will happen to firms demand and supply curve if it takes on the initiative of differentiating its product from others
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In a monopolistic competition with zero profits, the demand curve and the average cost curve must be tangent.

Whatever the firms decide to do to increase their profitability, it totally depends on how they differentiate their product from others. A firm should be able to make an impact on the demand for its product through the differentiation. In a monopolistic competition the firms demand curve is downward sloping unlike perfect competition. This gives them the ability to set their own price for their product and not just take the market price for
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The diagram shows that the firm produces at Q and the price charged is P, this practice results in allocative inefficiency just like in the case of a monopolist. A monopolist or monopolistic producer can produce at the point where marginal cost cuts the demand (AR) but rather he chooses to produce less and charge high. This causes inefficiency as the firm does not produce at socially optimal points, which is shown in green in the above graph. Points A and B show the changes in consumer and producer surplus if the firm decides to produce at socially optimal points. Any price that is not a competitive price will cause inefficiency, area B + C depicts the loss that occurs in the economy due to low production by a monopolist. Sum of area B and C is referred to as dead weight loss. It measures the value of the output lost by comparing it with the price people are willing to pay for

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