Explain the significance of the feature 'product differentiation' in monopolistic competition.

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Solution

Product differentiation is a distinct feature of monopolistic competition. Though the number of firms is large, their products differ in colour, shape, brand, quality, durability, etc. Its significance is as given below:

(i) It allows a firm partial control over price of its product

(ii) It causes high elasticity of demand for the firm's product owing to the availability of a large number of close substitutes.

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