Question

(a) Which market structure, Perfect Competition, Monopoly, or Monopolistic competition, will result in the greatest degree of choice between alternate products for consumers? Please give an explanation.

(b) In which market structure are firms most likely to advertise? Please explain.

Answer 1

(a)

Perfect competition is a form of market structure where there are many sellers and buyers in the market producing homogeneous goods. Since there are so many sellers and buyers, no 'one' seller has control over the prices and thus the firms are price takers. Since they sell homogeneous goods that are perfect substitutes for each other, there is no degree of choice for them to offer to the consumers as all the goods are the same.

Monopoly is the type of market structure where there is the only seller in the market for the good and as he is the only seller in the market for that good, he has full control over the prices of the goods being sold, and thus he is a price maker. As he only sells one type of good, there is no degree of choice between different products for them to offer to the consumers.

Monopolistic competition is a form of market structure where there are many firms in the market producing differentiated goods that are not perfect substitutes for each other. These goods are differentiated in terms of either quality, packaging, marketing strategies, etc. Since these goods are differentiated of some kind, the firms in this market have a little market power and thus they are the price makers in such a market. Since these firms sell goods that are differentiated in some kind, they give a choice or a degree of choice for the customers to choose from different goods in the market according to their preferences. Thus, monopolistic competition is a type of market structure that results in the greatest degree of choice between alternative products for customers.

(b)

Monopolistic competition is a type of market structure where the firms are most likely to advertise. Firms in this market structure advertise heavily. The reason for this is that they deal in differentiated goods rather than homogeneous goods (that are perfect substitutes of each other). Therefore to let people know how their good is slightly different from other goods in the market, they need to advertise heavily their products so that the customers get a clear view of how the good is differentiated and then it becomes easy for customers to choose according to their preferences.