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CA Foundation · Business Economics · Price Determination in Different Markets

In the market for a particular brand of toothpaste, many firms sell products that are close but not perfect substitutes, and each firm spends heavily on advertising and packaging. Which classification of market best describes this, and what is the main reason?

This is monopolistic competition. There are many sellers, and each sells a differentiated but closely substitutable product, using advertising and branding as non-price competition. Perfect competition would need identical products, and oligopoly would need only a few sellers.

  1. APerfect competition, because there are many sellers
  2. BMonopolistic competition, because there are many sellers with differentiated productsCorrect
  3. COligopoly, because advertising is used
  4. DMonopoly, because each brand is unique

Explanation

Many sellers offering differentiated but close substitute products, with non-price competition such as advertising, is the hallmark of monopolistic competition. Perfect competition requires homogeneous products, so the first option is wrong even though sellers are many. Each brand is a monopolist only over its own brand, not the market for toothpaste.

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