In monopolistic competition, high product differentiation is generally accompanied by which of the following?

• A. Greater pricing power for individual firms
• B. Barriers to entry for new firms
• C. Homogeneous products across all firms
• D. Perfectly elastic demand curves for firms

Answer: (A)

Verified step by step guidance

1. Understand the concept of monopolistic competition: it is a market structure characterized by many firms selling products that are similar but not identical, meaning there is product differentiation.
2. Recognize that product differentiation means each firm’s product is somewhat unique, which affects the demand curve they face.
3. Recall that when products are highly differentiated, consumers perceive differences and may prefer one firm's product over another, giving that firm some control over its price.
4. Know that greater product differentiation reduces the substitutability between products, making the demand curve for each firm less elastic (less perfectly elastic).
5. Conclude that high product differentiation in monopolistic competition leads to greater pricing power for individual firms, as they can raise prices without losing all their customers.