In monopolistic competition, firms differentiate products, giving them some pricing power. Which statement best describes pricing in this market?

• A. They have some price-setting power due to product differentiation
• B. They have no price-setting power
• C. They have perfect substitutes
• D. They face high barriers to entry

Answer: (A)

Product differentiation in monopolistic competition creates a downward-sloping demand for each firm's product, so the firm can raise price above marginal cost and still attract some buyers. That gives the firm some price-setting power, though it’s limited by the presence of close substitutes and easy entry. The other ideas don’t fit: there isn’t zero price-setting power since products differ, there aren’t perfect substitutes because differentiation matters, and barriers to entry are not high, which keeps firms from sustaining large pricing power.