Types of Market Structures

Question 1

Monopolistic Competition

Answer 1

• market structure where a large number of small firms compete against each other
• products are differentiated –> allows them to charge higher prices within a certain range
• prices set above marginal cost –> higher prices = lower output –> socially not optimal output
• EG –> market for cereals
• Profit = P1-P2 * Q1 = PABC

Question 2

Assumptions of MCompetition

Answer 2

• firms maximise profits
• ease of entry/exit
• firms sell differentiated products
• consumers may prefer one product over the other

Question 3

Advantages of M Competition

Answer 3

• no significant barriers to entry –> markets are relatively contestable
• differentiation = diversity, choice and utility
• market is more efficient that monopoly but less efficient that perfect competition –> less allocatively and productively efficient –> can be more dynamically efficient –> innovation

Question 4

Disadvantages

Answer 4

• some differentiation does not create utility but generates unnecessary waste –> excess packaging
• there is allocative inefficiency in both the long and short run