An industry said to be characterized by monopolistic competition is the apparel industry. In May 2015, a Wall Street Journal article on apparel pricing began this way: “Remember all the nifty bargains you found shopping for clothes last year? So do retailers. And, they vow never again. For two years, stores have countered slowing demand for apparel – from sweats to cocktail dresses – with constant discounting, trying to spur demand by giving up profits. Now, after one of their least profitable years, big apparel merchants are ruling out another avalanche of sales and markdowns . . . They are developing an array of merchandizing gimmicks to wean shoppers off their addiction to deep discounts.”
Not surprisingly, this scenario sounds quite familiar, especially during the holiday seasons. The issue is whether monopolistic competitors can protect their profits. Suppose you were hired as a consultant by a firm in this industry. How would you advise the firm as to the levels of output, price, and advertising in order to protect their profits? What problems might the firm encounter?