Answer to Question #98316 in Microeconomics for Shafiqah

Question

1- i.Explain the difference between a perfectly competitive market and a monopolistic market using a suitable graph.
ii.What are the characteristics of an oligopolistic competition?

Answer 1

1. In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.
2. An oligopoly is an industry dominated by a few large firms. For example, an industry with a five-firm concentration ratio of greater than 50% is considered a monopoly.

There are different possible ways that firms in oligopoly will compete and behave this will depend upon:

• The objectives of the firms; e.g. profit maximisation or sales maximisation?
• The degree of contestability; i.e. barriers to entry.
• Government regulation.

There are different possible outcomes for oligopoly:

1. Stable prices (e.g. through kinked demand curve) – firms concentrate on non-price competition.
2. Price wars (competitive oligopoly)
3. Collusion- leading to higher prices.