1.What are the two types of market structure? List the distinguishing feature of each type. 2. What are the characteristics of pure competition, monopoly, oligopoly, and monopolistic competition? Cite an example of a firm that operates in each market structure. 3. Differentiate cartel from collusion. Cite an example for each. 4. What are the determinants of market structure? Briefly explain each determinant. 5. What are the types of oligopoly? Cite an example for each type.
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Answer:
1. The two types of market structure are perfect competition and imperfect competition. In perfect competition, there are many small firms producing a homogeneous product, with perfect information and no barriers to entry. In contrast, imperfect competition includes monopolistic competition, oligopoly, and monopoly where there are a few large firms controlling the market, and there may be barriers to entry.
2. Pure competition is characterized by many small firms producing identical products, with no control over market price, and perfect information. An example of a firm operating in pure competition is a farmer selling wheat. Monopoly is characterized by one large firm controlling the entire market, with significant barriers to entry. An example of a monopoly is a water utility company. Oligopoly is characterized by a few large firms controlling the market, with a high level of interdependence between firms. An example of an oligopoly is the automotive industry. Monopolistic competition is characterized by many small firms producing differentiated products, with a limited control over the market price. An example of a firm operating in monopolistic competition is a fast-food chain like McDonald's.
3. Collusion occurs when firms work together to set prices or reduce output to increase their profits. An example of collusion is the OPEC oil cartel. In contrast, a cartel is a formal agreement among firms to coordinate prices and output, usually illegal and prone to breaking down. An example of a cartel is the infamous drug cartel in Mexico.
4. The determinants of market structure include the number and size distribution of firms, barriers to entry, degree of product differentiation, government regulations, and economies of scale. A market may be more concentrated if there are fewer firms operating in the industry and if there are significant barriers to entry. Moreover, a market may be less competitive if firms have some control over the price and there is a high degree of product differentiation, along with government regulations. Lastly, economies of scale may lead to larger firms having a cost advantage over smaller ones.
5. The types of oligopoly include collusive oligopoly, non-collusive oligopoly, and homogeneous oligopoly. Collusive oligopoly is characterized by firms working together to set prices and reduce competition. An example is OPEC. Non-collusive oligopoly is characterized by firms competing against each other but with the understanding that their actions may influence each other's profits. An example of non-collusive oligopoly is the automotive industry. Homogeneous oligopoly is characterized by firms producing identical products and competing mainly on price. An example of a homogeneous oligopoly is the market for gasoline.