(a) Explain the feature of ‘‘product differentiation’’ in the monopolistic competition form of the market, with a suitable example.

(b) Under the oligopoly form of market, why does the feature of ‘‘price rigidity’’ exist?

a)

● Product differentiation refers to the differentiation made in products on the basis of size, color, brand etc.

● It exists in monopolistic competition.

● A monopolistic market has a large number of producers.

● They produce a product which is slightly different from the others.

● The producer tries to influence the customers to purchase their own products.

● The demand curve is negatively sloped. He can sell a higher quantity at a lower price or a lower quantity at a higher price.

● There is very little chance of price discrimination in the sales of goods in the market due to product differentiation.

b)

● Price rigidity refers to a situation where the price remains constant with complete disregard to any change in the demand and supply.

● The oligopolistic market has firms that are able to influence the price.

● If a firm reduces its price, the rival firms will also do the same.

● If a firm raises its prices, the rival firms will not do so. This will lead to a loss of customers.

● So, price rigidity exists in the oligopoly form of the market.