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:
a. Perfect competition - this is a market structure where there are numerous suppliers and buyers of a homogeneous product. The distinguishing feature is that no single buyer or seller can influence the market price.
b. Imperfect competition - this is a market structure where there are a limited number of suppliers and buyers, and the goods and services offered are not necessarily homogeneous. The distinguishing feature is that the actions of one seller or buyer can impact the market price.
2.
a. Pure competition - characterized by many sellers, homogeneous products, free entry and exit, and perfect information. An example is the agriculture industry where there are many farmers selling the same crops.
b. Monopoly - characterized by a single seller, no close substitutes, high barriers to entry, and significant control over the price. An example is Microsoft, which holds a significant market share in the computer software industry.
c. Oligopoly - characterized by a few dominant firms, high barriers to entry, and interdependence among firms. An example is the airline industry where only a few major airlines operate.
d. Monopolistic competition - characterized by many firms, differentiated products, and relatively easy entry and exit. An example is the fast-food industry, where there are many chains with different menus and themes.
3.
a. Cartel - a group of firms that come together to act as a single entity in order to control prices and eliminate competition. An example is the Organization of the Petroleum Exporting Countries (OPEC), which sets the price of oil through its member countries.
b. Collusion - an agreement among firms to work together to fix prices or control markets. An example is the alleged collusion among major banks to manipulate the LIBOR interest rates.
4. The determinants of market structure are:
a. Number of firms - the more firms there are, the more competitive the market.
b. Product differentiation - if products are distinct, then firms can have market power.
c. Barriers to entry - if there are high barriers to entry, such as high startup costs or strict regulations, then fewer firms will enter the market, leading to fewer competitors.
d. Control over price - if a firm has significant control over the price, then they have market power.
e. Investment requirements - if firms need to make large investments to enter the market, they are less likely to do so, which can lead to fewer competitors.
5. The types of oligopoly are:
a. Collusive oligopoly - where firms collude to act as a single entity and maximize profits. An example is the diamond industry, where a handful of firms control the majority of diamond production and pricing.
b. Non-collusive oligopoly - where firms do not collude, but still have interdependent pricing decisions. An example is the global automobile industry where firms must consider the pricing decisions of competitors in order to remain competitive.