Similar to perfect competition, a market characterized by monopolistic competition features multiple producers and buyers with low barriers to entry or exit. However, this market structure is distinguished as the sellers attempt to differentiate their product relative to those offered by their competitors. In differentiating their products, sellers keep in mind the consumers’ defined preferences and taste. (Samuelson and Nordhaus 1993)
In this regard, Sony has taken advantage of its technological expertise and released a product, the PSP, which remains unmatched hitherto. As mentioned, Sony differentiated its product by including features that allow playing of music or film and wireless web browsing apart from the games commonly offered by hand-held gaming gadgets. As such, the product has no direct substitute. In light of the uniqueness of PSP, Sony somehow is able to exert a certain degree of influence over its target market (Gans, King, Stonecash and Mankiw 2003).
It is also argued that a monopolistically competitive market fosters advertising and creation of brand names (Gans, King, Stonecash and Mankiw 2003). These facets of monopolistic competition played a vital role in Sony’s business strategy for PSP. With the reputation it has built as a reliable manufacturer, Sony has banked on its brand equity in marketing the product. Furthermore, Sony’s PlayStation product line remains the top product in the console gaming industry. The carryover of Sony’s brand equity coupled with its aggressive advertising and the promotional scheme has resulted in the company’s apparent success with PSP.
Based on the above, Sony has some degree of control over the market. Thus, the company has the ability to set the price of PSP higher without any adverse effects on its income. This point would be further elaborated in the section on the Elasticity of Demand and Supply.
Factors of Demand
Choice of consumers and the utility they derive in using a product have a direct influence on demand. Consumer behavior is substantially dependent on the premise that people are inclined to choose goods and services they highly value (Mankiw 2004). Given this factor, Sony has incorporated the features it deems are valuable to gamers. Gamers are usually techies, who also enjoy other high-tech features of a gadget apart from the games. To be the choice gaming gadget, Sony has added important facets to the PSP that will appeal to its intended market and make them prefer this product to other gadgets.
In addition, gamers would opt for the PSP since they derive higher consumer surplus from using this product. This means that the value and utility of PSP to gamers is relatively higher over the price they paid to purchase the product (Varian 2003). (Varian 2003). With the variety in features, consumers obtain greater satisfaction in using the PSP as compared to the competition such as GameBoy. As evidenced by the market’s response, addressing consumer preference and taste is the main demand driver for Sony’s PSP.