Quiz 13: Monopolistic Competition and Oligopoly
Monopolistic competition is characterized by that market structure where there is vigorous competition. There are large number of buyers and sellers each selling a differentiated product. There is free entry and exit of sellers. Both buyers and sellers have perfect information about the market. It is quite similar to perfect competition In the long run monopolistic competition earns normal profit. In some cases products allow P MC but vigorous price and product quality price competition keeps P = AC. Examples of monopolistically competition are a consumer financial services, professional services, restaurants, and broad range of industries producing clothing.
(A) Import quotas restrict the number of imports into the country. Therefore, when import quotas are decreased it results in fewer substitutes in the market of automobiles. Due to this, sellers can raise their prices that will increase their profit margin. (B) An elimination of uniform emission standards results in more product differentiation on behalf of sellers. Therefore, for product differentiation they can charge higher prices. This will increase their profit margin. (C) An increase in price of advertising will increase their cost. Due to this, their profit margin will decline. (D) An increase in import tariffs (taxes) increases the price of imported cars due to which demand for imported cars will be reduced. It will results in fewer substitutes in the market. Due to this, sellers can raise their prices that will increase their profit margin. (E) A rising value of the dollar that has the effect of lowering import car prices will make imports more attractive to car buyers. Thus, domestic producers will have to face competition with cheap prices of imported cars. This will reduce their profit margin.
Oligopoly firms have the ability to set pricing and production strategy. This facility enables them to enjoy the potential for economic profits in both the short run and long run. Oligopoly competition is characterized by that market structure where there are few sellers; products are both homogenous and heterogeneous. There is blocked entry and exit of firms. In the market there is imperfect information about the product. There is an opportunity of economic profits in long run equilibrium. Competitive advantages keep P MC and P = AR AC for efficient firms. Examples, of the oligopoly market structure are bottled and canned soft drinks, brokerage services, investment banking, pharmaceuticals, tobacco, and so on.