Monopolistic Competition and Product Differentiation

Consumers purchase from multiple businesses that sell almost identical products. However, competition is high and highly fragmented. One such example would be the flipbook software market – i.e., software that allows you to turn a PDF into an interactive online publication (flipbooks). This is also an example of monopolistic competition; the idea behind monopolistic competition is that businesses have many different ways to compete (with product differentiation) instead of offering the same exact product (product homogeneity).

Flipbook providers appear to be the same/interchangeable to the customer initially. Many have similar features that allow customers to create digital flipbook by uploading a PDF file and converting it into an interactive digital flipbook with realistic page flips. Yet when you take a deeper look at the market, you notice that the economics of the flipbook providers suggest otherwise. Their product attributes—such as design, branding, integration with marketing tools, analytics dashboards, privacy controls, loading time, the number of templates available, level of customer support, and pricing models—indicate meaningful differentiation.

Monopolistic competition refers to a variety of similar products produced by different companies; each firm has a little bit of its own product, so it has a degree of consumer power in the market for that exact type of product. Each consumer will ultimately make their final decision about what product to buy based on their preferences, which can lead to a segmentation of the market into multiple sub-groups for different types of consumers buying similar types of products.

For example, educators may emphasize ease of use and price when making their decision as to which product to purchase. Marketing teams may emphasize advanced analytics and the ability to generate leads when deciding which product to purchase. Publishers may emphasize visual quality and distribution capabilities when determining which product to purchase. eCommerce businesses may emphasize catalog capabilities and the ability to integrate with a sales platform when determining which product to purchase.

The economic forces that affect this form of competition are closely associated with heterogeneity among consumers and the accessibility of technology to facilitate the creation of software tools and cloud infrastructure for application development. As software tools for developing applications and cloud infrastructure have become available to more companies, it is easier for more companies to enter the application market and to target specific user segments.

In addition, as consumers have different needs, it is advantageous for companies to be specialized (as opposed to competing on price only) in order to meet the needs of different segments.

The relationship between demand and price sensitivity can be defined as elastic. Therefore, any increase in the price for a common service will likely lead customers to switch to a competitor. Also, it is important to differentiate your company from the competition to decrease demand elasticity. If your company's products or services provide customers with a level of value that is not based on the price, your company will be able to sustain its customer base regardless of the price charged. This differentiation could take the form of unique branding possibilities, advanced analytics, etc. The establishment of these unique aspects of service will give your customers value that they will receive when they purchase their product or service.

As a result, many companies are involved in non-price competition in this industry. Rather than lowering their prices, these companies are investing in product design, user experience, and features. Many flipbook companies are investing in interactivity by adding videos and click-through links while others are investing in security and document control for their enterprise clients. The establishment of these key differentiating factors will help your company develop a loyal customer base in a highly competitive and saturated market.

The scale of competition in this market can be illustrated with real-world examples. The global market for digital publishing and content experience has been estimated to be worth a few billion dollars and is growing due to many companies shifting to the online distribution of their content. Within this market are dozens of providers, each of whom has a small percentage of the market share. Subscription costs vary widely, from less than $10 a month for basic services to more than $100 per month for enterprise-grade services. The wide range of subscription costs is based on perceived value rather than the functionality offered by the product.

An additional consideration is switching costs. Many companies find it very easy to try out a new platform, but when a client has already integrated their flipbook tool into their process, they could incur three types of costs if they switch to a different platform: the time and effort required to migrate content to the new platform, retraining employees, and updating any embedded links to the flipbook tool across their websites.

Switching costs can create a relatively stable customer base for companies and, as a result, reduce the company’s churn rate.

In a competitive market, companies that offer something different from what the typical company provides have the potential to be successful. Because there are many different companies in this type of marketplace, each will create or focus on one or more niches it serves. New firms and established firms must develop new ways to offer unique products or services and remain competitive by providing customers with something distinct from other businesses in the same industry.

At the same time, many companies will continue to innovate their product lines, enabling consumers to buy products that match their preferences more closely than if they were purchasing a traditional brand. Over time, the way companies apply differentiation in competition will change; therefore, each company will need to devise new means to set itself apart from its competitors.

The flipbook software industry is an example of a monopolistically competitive market where companies can survive and evolve.