Market Structures - Characteristics

Question 1

What are the characteristics of a monopoly?

Answer 1

1. A single seller of a good or service
   
   • No competition
   • Firm is price maker
2. Profit maximisation
3. No substitutes for the good or service
4. Very high barriers to entry
   
   • Insulated from competition in the long run
5. Imperfect knowledge
   
   • Patents and trademarks etc

Question 2

What are the characteristics of an oligopoly?

Answer 2

1. Only a few large firms
2. High barriers to entry
   
   • New entrants cannot easily compete away SNP
   • Small firms may exist but have little impact on
     price
3. Non-price competition (product differentiation)
4. High sunk costs
5. Interdependency
   
   • Decisions on price and output based of likely
     reactions of other firms in the market

Question 3

What are the characteristics of monopolistic competition?

Answer 3

1. Large number of firms
2. No dominant firm
3. Low barriers to entry
   
   • New entrants will be attracted by SNP which can
     be competed away in the long run
4. Product differentiation
   
   • Brand loyalty
   • Sunk costs e.g. advertising
   • Results in downwards sloping demand curve as
     fall in price does extend demand
5. Fairly close substitutes

Question 4

What are the characteristics of perfect competition?

Answer 4

1. Profit maximisation
2. Price taker so perfectly elastic D=AR=MR curve
3. Homogeneous products
   
   • No brand loyalty
4. No sunk costs
5. No barriers to entry or exit
   
   • Profit only possible in short run
6. Perfect knowledge