Question

Which firm is the oligopolist?

Choose one:

Firm A is in retail. It is one of the largest and most popular clothing stores in the country. It also competes with many rivals and faces intense price competition

Firm B is in the auto rental business. It is not the nation's largest rental company, but significant barriers to entry enable it to serve customers across the United States more conveniently and at a lower price than local rivals.

Firm C is a restaurant in a small, Isolated community. It is the only local eatery, People drive from miles away to eat there

 

Part 2

The domestic airline industry features a number of major airlines but also many smaller rivals. Is this a good example of oligopoly or of monopolistic competition?

Answer 1

Solution:

1. Option - 2 is correct which states Firm B is in the auto rental business. It is not the nation's largest rental company, but significant barriers to entry enable to serve customers across the United States more conveniently and at a lower price than local rivals.

The Reason:

The characteristics of Firm B are of an Oligopolist Firm such as,

"significant barriers to entry"

Barriers to entry and exit:- The main reason for a few firms in an oligopoly is the barriers to the entry of new firms and the exit of existing firms. The requirement of large capital, patents, etc is some of the barriers which prevent new firms from entering into an oligopoly. As a result, firms can earn abnormal profits in the long-run.

"Lower price than local rivals"

Non-Price Competition:- Under oligopoly, firms are in a position to influence the prices but they try to avoid it due to the fear of price war. They follow the policy of Price rigidity. Price rigidity refers to a situation in which price levels to stay fixed irrespective of change in supply and demand.

Due to the above characteristics of Firm B, we can say that FIrm B is an oligopolist.

Therefore, Option - 2 is correct.

Reasons for other incorrect options:

Option - 1 is incorrect because there is Non-Price Competition in an oligopoly i.e no price competition among firms in an oligopoly market and also a few firms rather than many firms in an oligopoly. Therefore, this option is incorrect.

Option - 3 is incorrect because only local eatery means monopoly in the market i.e. no competing firm in the market. This is a characteristic of a Monopoly. Therefore, this option is incorrect.

2. This is a good example of monopolistic competition.

The Reason:

"features a number of major airlines but also many smaller rivals"

It is an example of monopolistic competition,

Large Number of sellers:- The above-quoted characteristic is of monopolistic competition as a large number of sellers exist in a monopolistic competition.

It is not an example of Oligopoly because,

Few Firms:- Only a few firms exist in an oligopoly and it is one of the main characteristics of an Oligopoly.

Therefore, The above is a good example of monopolistic competition.