Market Structure and Pricing: Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly (Overview) Questions

Question 1

What is market structure?

Accepted Answer

**Market structure** refers to the characteristics of a market (number of firms, product nature, entry barriers) that determine competition and pricing power.

Question 2

Who is a price taker?

Accepted Answer

A **price taker** is a firm that accepts the market price and cannot influence it (typical in perfect competition).

Question 3

Define monopoly.

Accepted Answer

**Monopoly** is a market with a single seller and no close substitutes, with high barriers to entry.

Question 4

What is oligopoly?

Accepted Answer

**Oligopoly** is a market dominated by a few large firms whose decisions are interdependent.

Question 5

Write one feature of perfect competition.

Accepted Answer

Feature: many sellers and a **homogeneous product**, so firms are **price takers**.

Question 6

Write the profit maximization condition.

Accepted Answer

A firm maximizes profit when **MR = MC**.

Question 7

Explain determinants of market structure (any four).

Accepted Answer

Determinants of market structure (any four):
- **number and size of firms** in the market
- **product differentiation** (brand/quality differences)
- **barriers to entry** (capital, technology, legal/patent)
- availability of information and market transparency
- government regulation and control of key resources

Thus, these factors decide competition and pricing power of firms.

Question 8

Explain features of perfect competition (any five).

Accepted Answer

Features of **perfect competition** (any five):
- very large number of buyers and sellers
- **homogeneous product**
- **free entry and exit**
- perfect knowledge/information
- firms are **price takers** (no control over price)
- negligible selling cost (little advertising)

Hence, price is determined by market forces and individual firms accept it.

Question 9

Explain monopoly: sources/causes (any four) and one limitation.

Accepted Answer

Sources/causes of **monopoly** (any four):
- **legal protection** (patents, licenses)
- control over key raw material
- **natural monopoly** due to high fixed cost/economies of scale
- technological superiority
- government ownership

One limitation: monopoly may lead to **higher prices** and reduced consumer welfare if not regulated.

Question 10

Differentiate between perfect competition and monopoly (any three points).

Accepted Answer

Perfect competition vs Monopoly:
- **Number of firms**: many firms vs one firm.
- **Product**: homogeneous vs no close substitutes.
- **Price control**: price taker vs price maker.
- **Entry barriers**: free entry/exit vs high barriers.

Thus, monopoly has greater pricing power and less competition than perfect competition.

Question 11

Explain oligopoly and why prices may be rigid (any three points).

Accepted Answer

**Oligopoly** is dominated by a few firms and decisions are **interdependent**.

Prices may be rigid because:
- if one firm raises price, others may not follow → it loses customers.
- if one firm cuts price, rivals may match → price war and lower profits.
- therefore firms prefer non-price competition like advertising and service.

Hence, fear of competitor reaction often keeps prices stable in oligopoly.

Question 12

Compare market structures (perfect competition, monopoly, monopolistic competition, oligopoly) with a table.

Accepted Answer

### **Comparison of Market Structures**

| Feature | Perfect competition | Monopoly | Monopolistic competition | Oligopoly |
|---|---|---|---|---|
| Firms | many | one | many | few |
| Product | homogeneous | unique/no close substitutes | differentiated | homogeneous/differentiated |
| Entry | free | blocked | relatively easy | difficult |
| Price control | none | high | some | considerable (strategic) |
| Competition style | price-based | limited | advertising + differentiation | strategic + non-price |

Thus, pricing power increases as competition decreases.

Question 13

Explain price determination under perfect competition and monopoly with a flowchart (exam-style).

Accepted Answer

### **Price Determination: Perfect Competition vs Monopoly**

#### **Perfect competition (price taker)**
- Market demand & supply determine **price (P)**.
- Firm accepts P and chooses output where **P = MC** (since MR = P).

#### **Monopoly (price maker)**
- Monopolist faces market demand curve.
- Chooses output where **MR = MC**.
- Sets price from demand curve corresponding to that output.

```text
Perfect competition:
Market sets P → Firm chooses Q where P = MC

Monopoly:
Choose Q where MR = MC → Set P from demand curve
```

Thus, competitive price is market-determined, while monopoly price is firm-determined based on demand and cost conditions.

Question 14

Explain non-price competition with examples and why it is important in oligopoly/monopolistic competition.

Accepted Answer

### **Non-Price Competition**

Non-price competition means firms try to increase sales without changing price.

**Methods/examples:**
- **advertising** and brand building
- product differentiation (features, quality, packaging)
- better customer service, warranty, after-sales support
- distribution network improvements

**Why important in oligopoly/monopolistic competition:**
- price changes may cause **price war** (oligopoly) or reduce profits.
- differentiation helps firms gain customer loyalty and some pricing power.

Thus, non-price competition becomes a key strategy when price competition is risky or limited.

Question 15

Explain kinked demand curve and price rigidity in oligopoly with a simple diagram/flow (basics).

Accepted Answer

Kinked demand curve explains **price rigidity** in oligopoly.

Key idea:
- If a firm **raises** price, rivals may not follow → it loses many customers (demand becomes more elastic).
- If a firm **reduces** price, rivals may match → little gain and profit falls (price war risk).

Thus, firms avoid changing price frequently and prices tend to remain **rigid/stable** in oligopoly.

Market Structure and Pricing: Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly (Overview)

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