Question

• What are the conditions that define monopolistic competition, and those that define oligopoly?
• How do prices and outputs under monopolistic competition compare with those under perfect competition?
• How are Oligopolies organized?
• How do prices and outputs under oligopoly compare with those under perfect competition?

Answer 1

1. Conditions that define monopolistic competition are:

A) in monopolistic competition there are large number of relatively small firms that operate in the market.

B) Each Firm has freedom to enter or exit the industry.

C) Each firm sells differentiated product.

Conditions that define oligopoly are:

A) in oligopoly there are small number of large firms that operate in the market.

B) Each firm either sells homogeneous or differentiated product.

C) There are significant barriers to entry for other firms.

2. In monopolistic competition, each firm produces differentiated product and in perfect competition, the product produced is homogeneous.

In perfect competition, the demand and supply forces determines the market price and each firm is bound to sell their product at that market price. But in monopolistic competition, as each firm produces differentiated product, therefore each firm has control over market price and sets price that is higher than the perfect competition price.

However, in Long run both perfect competition and monopolistic competition firms produce output that earn them zero economic profit in Long run equilibrium.