Chapter 8: Monopoly, oligopoly and monopolistic competition

Question 1

What are the characteristics of monopoly?

Answer 1

1. One firm in the industry
   - there is only one firm in a pure monopoly and hence the monopolist and industry are one
2. High barriers to entry
   - existing firms are able to prevent new firms from entering the industry
3. Imperfect information
   - other potential sellers do not have sufficient information about the production process of rival firms and likewise consumers may not be perfectly informed about the diff prices the monopolist may charge diff groups of consumers
4. Unique product
   - the product sold has no close substitutes, making the demand highly price inelastic

Question 2

What are the characteristics of oligopoly?

Answer 2

1. A few dominant firms in the industry
   - there are a few dominant firms with major market shares (although there may be smaller firms co-existing and supplying the remainder of the market)
2. High degree of mutual interdependence
   - each firm will have to weigh the effect of its own strategies on rival firms’ behaviour and the effect of rival firms’ behaviour on itself
3. High barriers to entry
   - significant barriers to entry
4. Imperfect information
   - firms don’t have sufficient information about the production process adopted by rival firms and likewise consumers may not be perfectly informed of the different prices charged to different groups of consumers
5. Homogeneous or differentiated products
   - virtually similar but not entirely substitutable

Question 3

What are the characteristics of monopolistic competition?

Answer 3

1. Large number of small firms in the industry
   - insignificant market share held by each firm
2. No barriers to entry
   - similar to PC mkt
3. Imperfect information
   - each producer may not be fully aware of rival firms’ production processes and likewise consumers may not be fully aware of the diff prices charged by all firms
4. Differentiated products
   - firms attempt to use advertising to differentiate their products from rivals (may go beyond physical differences; eg convenience) allows them to have some market power