Final answer:
Variation in customer needs leads to market segmentation to cater to diverse preferences, symbolizing the core of product differentiation and monopolistic competition (a). The debate continues on whether the extent of variety in a market-oriented economy is optimal, balancing between societal cost and consumer benefit.
Step-by-step explanation:
Variation in customer needs is the primary reason for market segmentation. The concept of differentiated products is closely related to the degree of variety that is available in the market. In an economy with less variety, such as one where everyone wears only blue jeans, consumes only white bread, and drinks only tap water, markets for clothing, food, and drink would be more perfectly competitive. However, it is the variety of styles, flavors, locations, and characteristics that creates product differentiation and monopolistic competition. This diversity caters to different consumer preferences, leading to market segmentation as businesses aim to satisfy the varied needs of distinct customer groups.
There is an ongoing debate about whether a market-oriented economy produces the optimal amount of variety. While some argue that a high degree of product differentiation and the associated advertising costs are socially wasteful, others believe that consumers benefit from the competition and the choice it creates. Deciding on the optimal amount of variety is challenging, and views on what variety means for consumers vary.