Most firms and business in our economy operate under monopolistic competition, and product differentiation in this
type of markets is one of the main factors that lead to price differentiation and high price elasticity of demand. In addition, and since prices affect quantity demanded inversely (higher prices lead to lower quantity demanded, and lower prices lead to higher quantities demanded), marginal revenue (the additional revenue from producing and selling an additional unit of output) will have a downward slope and will always be lower than prices on the demand curve.
So, since ease of entry is high in the monopolistically competitive market, and since making economic profits will always attract new producers (entrants), how do firms make profits in such environment? Is marginal analysis (cost, revenue, production level) still applicable in determining the optimal level of output?
Provide an example of a firm or a small business from the real world that is surviving the dynamic nature of monopolistic competition and discuss some approaches they have used (or are using) to compete and survive in this environment.
Use the world as your knowledge-generating machine and be critical, after all, there is no chocolate flavored gas and all gas sold in gas stations taste the same as far as my car’s concern, still gas prices are not identical!