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ACCA Practice & Revision Kit FAB/AB (1 Sep 2019 – 31 Aug 2020) book
Q 4.17: ABC produces a variety of soft drink. It has two competitors but all three producers use product differentiation to distinguish themselves from each other. What type of market is this?
A: Oligopoly
I understood it having a small number of strong suppliers (competitors) fits Oligopoly however I thought the second sentence “all three producers use product differentiation to distinguish themselves from each other” is a strong clue of Monopolistic competition.
Can you please help me understand this better? Thank you!They are very close, to my mind, and often difficult to distinguish. The main differences between oligopoly and monopolistic competition relate to the number of firms.
Oligopoly involves a small number of large firms that closely monitor and react to each other’s pricing strategies. The firms can use both price and non-price competition, such as product differentiation or advertising, to gain a competitive edge. For example, petrol companies compete on price but also claim, for example, that their brand is better for engines of delivers more km/litre.
Monopolistic competition involves many firms that differentiate their products to compete in the market. For example, hotels. There are a large number of hotels all competing and trying to differentiate their basic offering (a place to sleep) using quality, leisure facilities, business services, restaurants etc.
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