In a competitive market, successful differentiation allows a firm to:

• A. eliminate all competition in the market
• B. guarantee perfect elasticity of demand for its product
• C. reduce its production costs to zero
• D. charge a higher price than its competitors

Answer: (D)

Verified step by step guidance

1. Understand the concept of product differentiation: In microeconomics, product differentiation refers to the process by which a firm makes its product distinct from competitors' products, either through quality, features, branding, or other attributes.
2. Recognize the effect of differentiation on demand elasticity: Differentiation typically reduces the price elasticity of demand faced by the firm because consumers perceive the product as unique, making them less sensitive to price changes compared to perfectly competitive products.
3. Analyze the impact on pricing power: Because the firm’s product is seen as different, it gains some market power, allowing it to charge a higher price than competitors without losing all its customers.
4. Evaluate the incorrect options: Differentiation does not eliminate all competition (other firms still exist), does not guarantee perfect elasticity (in fact, it reduces elasticity), and does not reduce production costs to zero (costs depend on technology and inputs).
5. Conclude that successful differentiation enables a firm to charge a higher price than its competitors due to increased market power and reduced price sensitivity among consumers.