Question

Suppose you manage a local grocery store and you learn that a very popular national grocery chain is about to open a store in your town a few miles away.

A. Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). Note, we are assuming you each sell one representative good.
B. Explain how the opening of this new store may affect your business. Be sure to address what can happen to your customers, supply and demand, and prices. What will happen to your profits? Show graphically and explain your reasoning in detail. (e.g., how and why will your profits change? How can that be seen on the graph?)
C. Explain at least one strategy that could be used to defend your market share against the new store (e.g., address what you are going to do to keep your customers).

Answer 1

The local grocery store in a monopolistic competition market will likely see a decrease in demand and profits with the entry of a national chain. Strategies to maintain market share include improving customer service, focusing on unique goods, and strengthening community ties.

Step-by-step explanation:

Analysis of the Impact of a New Store on a Local Grocery Store

When a new competitor such as a popular national grocery chain enters a market, which previously had a local grocery store operating under monopolistic competition, several changes can be expected. As the new store begins operation, customers might be lured away, affecting the demand for the local grocery store's products. Consequently, the local store may need to adjust the quantity of output (Q) and price (P) to remain competitive. In general, the quantity produced may decrease and prices may drop to retain customers.

Impact on the Business

The opening of the new store is likely to redirect some of the customer base, leading to decreased demand for the local store's products. This shift in demand will reduce the market share and profits of the local store. Unless the local store differentiates itself or competes effectively on another front, it will face a squeezing of its profit margins. On a graph, this is typically shown by a leftward shift in the demand curve, which leads to a lower equilibrium price and quantity.

Strategies to Defend Market Share

To defend against the market share erosion, the local grocery store could implement strategies like improving customer service, focusing on unique or local products, and strengthening customer relationships. Offering loyalty programs or engaging in community events could also help in retaining customers and potentially attract new ones.