Question

Question 2: a. Compare and contrast the four market structures we examined in class. b. Provide a business or industry example of each of the four market structures. Question 3 (Oligopoly): a. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly, b. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Answer 1

Ans 2 a. The following are the important forms of market. 1.Perfect competition -: Perfect competition exist when there is a large number of sellers and buyers of a commodity and no individual buyer or seller has any control over its price.The products are homogeneous and its price is determined by the forces of market supply and market demand.Three vital conclusions. A firm under perfect competition is a price taker not maker or the price is determined by the forces of market demand and supply

2.Large number of firms

3.Homogeneous product and perfect knowledge or buyers have perfect knowledge regarding product availability and product price or a producer cannot charge higher price .

Monopoly :: It is a form of the market in which there is a single seller of a product with no close substitutes.Differentiating features are ::

1. One seller and large number of buyers.

2.Restriction on entry of new firms

3.No close substitutes.

4.Full control over price.

5.Price discrimination : A monopolist charge different price from different buyers.

Monopolistic Competition ::

It is form of the market in which there are many buyers and sellers of the product but the product of each seller is different from that of the other.Differentiated features are

Large number of buyers and sellers but there is product differenciation.Freedom of entry and Exit and there is lack of perfect knowledge as sellers and buyers lack perfect knowledge about market and there is lack of knowledge about product features.

Oligopoly :: It is a form of the market in which there are a few big firms and a large number of buyers of a commodity also each firm has a significant share of the market.Also price and output decision of one firm significantly affect the price and output decisions of the rival firms in the market.The diffenciating features are

1.Small number of big firms.

2.High degree of interdependence

3.Entry barriers

4.Formation of cartels

Ans 2 b.) The industry and business examples are

In perfect compitition : Agricultural market, Forex market

Monopoly :E- commerce websites.Technology products like mirosoft, Apple.

Oligopoly : OPEC is the association of petroleum exporting coutries.

Monopolistic competition : Hotel and resturant business consumer services such as hair dressing.

Ans 3.a ) Oligopoly market has small number of big firms in the industry based on the market share of each firm which is very significant that its price and output policy has significant impact on the price and output policy of the rival firms hence there is a very high degree of interdependence among the competing firms.Hence there is an issue of self interest.Price of a producer firm may not be willing to raise price of the product fearing that rival firms might not raise it.Similarly a firm will not lower the price of a commodity fearing a rival firm might decrease the price in a greater extent and there is a great loss of the buyers.On the other hand the formation of cartels is there to avoid competition and is termed as cooperation.A cartel is a formal agreement among the firms to avoid competition , it is also called collusive oligopoly under it output and price are fixed by different firms or groups.All the firms accept the price as set by the price leader.

Ans 3.b) We can take an example of OPEC or the organisation of petroleum exporting countries.They are majorly middle eastern countries and some others here there is a seesaw of cooperation and self interest as some countries like Saudi Arabia etc wants to increase production inorder to gain from exports and that will results in increase in supply which ultemately lower the price which other cartel members do not agree as it will not be able to profit them .Similarly the cartel co-operate within the members regarding controlling the market share and by imposing entry barriers so that existing countries are not worried about new member country and membership matter is decided by the cartel.