MONOPOLISTIC COMPETITION AND OLIGOPOLY
QUESTIONS AND ANSWERS
Describe the monopolistically competitive market structure and give some examples.
Monopolistic competition is a market structure quite similar to perfect competition in
that vigorous price competition among a large number of firms and individuals is
The major difference between these two market structures is that at least
some degree of product differentiation is present in monopolistically competitive
As a result, firms have at least some discretion in setting prices.
the presence of many close substitutes limits the price-setting ability of individual
firms, and drives profits down to a normal rate of return in the long-run.
As in the
case of perfect competition, above-normal profits are only possible in the short-run
before rivals are able to take effective counter measures.
Examples of monopolistically competitive market structures include a broad
range of industries producing clothing, consumer financial services, professional
services, restaurants, and so on.
Describe the oligopoly market structure and give some examples.
Oligopoly is a market structure where only a few large rivals are responsible for the
bulk, if not all, industry output.
As in the case of monopoly, high to very high
barriers to entry are typical.
Under oligopoly, the price/output decisions of firms are
interrelated in the sense that direct reactions from leading rivals can be expected.
a result, the decision making of individual firms is based, in part, on the likely
response of competitors.
This "competition among the few” involves a wide variety
of price and nonprice methods of interfirm rivalry, as determined by the institutional
characteristics of a particular market setting.
Although fewness in the number of
competitors gives rise to a potential for excess profits, above-normal rates of return
are far from guaranteed.
Competition among the few can sometimes be vigorous.
Examples of the oligopoly market structure include such industries as:
and canned soft drinks, brokerage services, investment banking, long distance
telephone service, pharmaceuticals, ready-to-eat cereals, tobacco, and so on.
Explain the process by which economic profits are eliminated in a monopolistically
competitive market as compared to a perfectly competitive market.