Two of the four market structures, pure competition and monopoly, were covered in unit two. The other two, oligopoly and monopolistic competition, are part of unit three. Make sure you don't confuse monopoly with monopolistic competition. Monopoly is a market structure in which one firm has all or almost all of the market share of a good or service for which there are no close substitutes. Monopolistic competition is modified pure competition or fragmented competition. Monopolistically competitive industries consist of a large number of firms, none of which has a large market share. Oligopoly is different. This market structure involves an industry that is dominated by a small number of firms. The firms are interdependent in that they react to what their competitors do. For example, they have to choose whether to match or ignore a price increase initiated by a competitor.
1. If the four-firm concentration ratio is 60%, then the marketstructure is presumably monopolistic competition. True or false, and why?
2. A. Which of the four market structures applies to discount retailers (e.g., Wal-Mart)? Explain. 2. B. Which market structure applies to dry cleaners? Explain.
3. The kinked demand curve theory of oligopolistic pricing applies to some oligopolies, but not all. According to this theory, oligopolistic competitors will match both price increases and price decreases. True or false, and why?
4. Suppose a particular industry consists of four firms, each with a market share of 25%. What is the Herfindahl index for this industry? What market structure is this?
5. Why would a member of a cartel be tempted to cheat on a production agreement? How would it do this?