Question 4 (15 marks)

In 1896, Colgate dental cream was introduced in tubes similar to those we use now. Today, the Colgate-Palmolive Company's brand of toothpaste is the best-selling toothpaste in the world (ahead of the Crest brand marketed by Procter & Gamble, which was introduced in 1955).

While Colgate and Crest enjoy the lion's share of the toothpaste market, if you view the oral care shelf at your local drugstore or supermarket, you will find over a hundred different varieties of toothpaste. Colgate alone sells over 40 different varieties that are marketed under names ranging from Shrek Bubble Fruit to Colgate Total Advanced Whitening.

The high level of product differentiation in the toothpaste market stems from firms introducing new varieties in an attempt to boost their economic profits. In environments where makers of other brands (such as Crest) can easily enter profitable segments of the market, a profitable strategy is to attempt to quickly cover that segment (introducing Shrek Bubble Fruit toothpaste, for instance) in order to earn short-run profits until other firms enter to steal a share of that segment. While introducing new varieties may cannibalize sales of your existing products, cannibalizing your own sales is better than having them stolen by a hungry competitor.

a)What kind of market structure is described in the above paragraphs? Describe the key characteristics of this type of market structure?

Colgate toothpaste has an infinite cross price elasticity of demand. True or False? Explain.

b)Why would a major company like Colgate choose to sell so many different varieties of toothpaste that compete against each other for consumers' rupees?

(3 marks)

c)Is there any deadweight loss associated with this market structure? Why or why not? Use a diagram to explain this. (5 marks)