Market structure: monopolistic competition and oligopoly

Question 1

Define monopolistic competition.

Answer 1

a market that shares some characteristics of monopoly and some of perfect competition

Question 2

Give four examples of markets with monopolistic competition.

Answer 2

1. travel agents
2. hairdressers
3. fast food restaurants
4. taxis
   (basically anything with many firms with similar but not identical products)

Question 3

What is product differentiation?

Answer 3

strategy adopted by firms that marks their product as different to that of their competitors

Question 4

When there is monopolistic competition, will demand be price elastic or inelastic?

Answer 4

price elastic (but not perfectly), as products from different firms are substitutes but not exactly the same

Question 5

When there is monopolistic competition, are there barriers to entry?

Answer 5

no

Question 6

What are the three main features of monopolistic competition?

Answer 6

1. product differentiation
2. freedom of entry
3. many firms

Question 7

Is short run equilibrium under monopolistic competition the same as for a monopoly or perfect competition?

Answer 7

monopoly - with firms making supernormal profits

Question 8

In the long run, what will happen to a firm’s demand curve under monopolistic competition?

Answer 8

It will shift left, as the supernormal profits attract more firms and take some of the demand.

Question 9

Is productive efficiency achieved under monopolistic competition?

Answer 9

no, as firm will not operate at minimum point on long-run average cost curve

Question 10

Is allocative efficiency achieved under monopolistic competition?

Answer 10

no, as price charged is above marginal cost

Question 11

Is dynamic efficiency achieved under monopolistic competition?

Answer 11

maybe in short run if firms devote resources to improving products, but not in long run as firms will only make normal profits

Question 12

Is X-efficiency achieved under monopolistic competition?

Answer 12

maybe if firms devote excessive resources to advertising or innovation but extent likely to be limited by competition

Question 13

What does the n-firm concentration ratio measure?

Answer 13

market share of largest n firms in the industry

Question 14

Does higher n-firm concentration ratio mean the market is closer to monopoly than perfect competition?

Answer 14

monopoly

Question 15

In what two ways can the n-firm concentration ratio be measured?

Answer 15

• % of output
• % of employment

Question 16

Define oligopoly.

Answer 16

a market with few sellers in which each forms must take account of behaviour and likely behaviour of other firms in the market

Question 17

Give four examples of oligopolies in the UK.

Answer 17

1. tobacco
2. cars
3. newspapers
4. banks

Question 18

What method can be used to model the strategic interaction betweeen firms in an oligopoly?

Answer 18

game theory

Question 19

Give an example of game theory that can be applied to oligopolies.

Answer 19

prisoners’ dilemma

Question 20

What are the three possible outcomes of the prisoners’ dilemma?

Answer 20

1. both confess - both get long sentences
2. neither confess - both get short sentences
3. one confesses - he gets no sentence, other gets long sentence

Question 21

In game theory, what is a dominant strategy?

Answer 21

situation where a player’s best strategy is independent of those chosen by others

Question 22

How can the prisoners’ dilemma be applied to a duopoly?

Answer 22

Both will have dominant strategy of producing high output and low profits, whereas best outcome woud be low output and high profits.

Question 23

Define the Nash equilibrium.

Answer 23

when each player’s chosen strategy maximises payoffs given other player’s choice, so no player has incentive to alter behaviour

Question 24

Define a cartel.

Answer 24

agreement between forms on price and output with intention of maximising joint profits

Question 25

Define overt collusion.

Answer 25

when firms openly work together to agree on prices or market shares

Question 26

Is it legal to operate a cartel in the UK?

Answer 26

No, it is banned under the UK Competition Act

Question 27

Give an example of overt collusion.

Answer 27

OPEC - Organisation of Petroleum Exporting Countries controls the price of oil

Question 28

What is tacit collusion?

Answer 28

when firms refrain from competing on price but without communication or formal agreement

Question 29

Define monopsony.

Answer 29

market with a single buyer

Question 30

Define oligopsony.

Answer 30

market with a few buyers