When a firm uses product differentiation the market structure of the firm is monopolistic competition. Examples of firms that use product differentiation are fast food companies such as McDonalds and Burger King. I believe that my firm could not benefit from product differentiation due to its integration to a perfect competition marketplace. Product differentiation would be an added cost that would not provide the firm with any added benefits.
I agree that competition in price and services can be as effective as price strategies. Proving a top customer service can improve the customer retention rate of the company. Quality products that last a long time help companies built a good reputation which increases sales in the long run. Since they are not able to achieve economic profits in the long run corporations prefer to use non price competition. There are dangers associated with price competition such as price wars. The use of non price factors such as marketing campaigns can improve the demand for the product without having to reduce the price.
A way to maintain the ability to be the sole participation in the marketplace companies can the legal protection that comes from obtaining a patent. A patent protects a company’s product for 17 years. Patents are utilized a lot in the pharmaceutical industry. Due to the massive amounts of money these firms invest in R&D they need patent protection to be able to get a return on their investment. A patent is the best way to achieve legal protection that allows a firm to participate in a monopoly marketplace.
Despite the fact monopolist can charge any price they want due to the lack of competition the monopolist structure is still subject to the law of supply and demand. I do not agree with the statement that monopolist raise price until customers are not willing to pay more. A lot of monopolists exist to serve a social purpose. For example the utilities companies often have regional