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Question
There are many manufacturers of pencils on the market who produce pencils in different designs and colours to attract children. Which market form is referred to here? Briefly explain the features of this market form indicated in the given situation.
Solution
There are many companies creating distinctive products to set themselves apart from rivals unlike perfect competition and many sellers engaged unlike oligopoly, where few firms dominate; so, a monopolistic competition has been referred to here.
A specific feature of monopolistic competition is that products differ depending on quality and branding. Despite the availability of close substitutes, this distinction helps companies gain some market power, hence allowing them to set prices above marginal cost and capture consumer loyalty.
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