Question

Explain the key differences in outcomes between markets consisting of price-setting firms and markets consisting of price-taking firms.

Select a specific real-world firm or market that we have not discussed in class or the online text and discuss what which model of market structure you think would be most appropriate to describe that market.

Real world markets never exactly meet the assumptions of the models, so you can also talk about what aspects of the real-world market may not fit the model what aspects are not well described by the model selected.

You might want to consider, if relevant, factors such as: the nature of the product, whether or not there are likely to be economies of scale, the number of competitors, the degree of market power, and outcomes such as prices, mark ups, profits and firm entry/exit.

Answer 1

1. the one is the price taking firms have different demand curves than market demand curve while the price setting firm have their own demand curve as market demand curve.
2. the price taking firms belong to perfectly competitive market and other one is monopolist.
3. the market power of perfectly competitive firms is zero while the monopolist have arbitrary power to make all decisions.
4. In perfectly competitive market (price taker) enjoy full freedom to enter and exit the market anytime as they enjoy only normal profits in the long run .while in monopoly,there is restricted entry due large number of barriers and they enjoys super normal profit.
5. A monopolist can charge different prices from different buyers and can discriminate.it is not possible in perfectly competitive market.

I would like to take an example of soft drinks ( coco cola) which comes in oligopoly market.

• price rigidity which now a days have no more remained the assumption of oligopoly. now even oligopoly firms tend to change their price frequently.
• If to talk about the competitors they are very few in number such as frooti but all have significant market share.
• In oligopoly ,it is difficult to enter the market due to high operating cost .so no free entry and exit.
• If it is collusive oligopoly then price and output decisions are taken together while non collusive oligopoly each one takes decisions independently.
• If it is collusive oligopoly they reap super normal profits otherwise normal profits.
• entry is also restricted as existing firms are operating at lowest average cost due to large scale economies of production.