(a) ‘‘A firm under perfect competition is a price taker, whereas, a firm under monopoly is a price maker.’’ Defend or refute the given statement with valid reasons.

(b) What is meant by ‘‘product differentiation’’? Explain with example.

(a) The given statement, “A firm under perfect competition is a price taker, whereas, a firm under monopoly is a price maker,” is true.

In a perfect competition market, every market will accept the price of a commodity after it is determined by the powers of the market demand and supply in the industry. The price policy they can adopt is very much dependent on other factors. This is because their contribution to the market is really small. In this situation, they cannot have any control over the market prices. The firms would not be ready to sell below the market price, and would lose customers if they exceed it. Therefore, it is known as the price taker.

In the monopoly market, there is only one producer of the commodity and therefore, the prices can be regulated by him alone without being dependent on any external factors. Since there is only one supplier of the good or service, the customer is forced to accept the price which it is being sold at. The firm ensures maximum profit by increasing the price whenever it wants to, together with ensuring that it doesn’t lose all its customers because of this. This is why it is known as the price maker.

(b) Product differentiation can be said to be a marketing process which is used to identify and communicate the unique benefits or qualities of a product compared to its competitors. Successful product differentiation is a key to success for any seller in the competitive market.

Product differentiation induces customer’s interest on seeing something unique and different. It can prove to be positive for brand loyalty and even survive a higher price point.

For example, two companies, A and B offer identical laptops. However, the product of company A comes at a lower price, has a better graphic display and does not get heated up quickly. Besides, the efforts in its packaging and advertising are greater. This creates the benefits of product differentiation of company A over B in the market and the customer would be more inclined towards the former’s products.