Chapter 15, Problem 11P

To determine

Concept Introduction:

Monopolistic competition: Such market has a less degree of competition than perfect competition market Examples: Detergents, textiles, automobiles, shop, drawings and TV. The features of monopolistic competition are:

• Large number of buyers and sellers: In monopolistic competition market, there are a large number of sellers and buyers.

• Product differentiation: This is one of the most important features of monopolistic competition. The product of the sellers is differentiated but is close substitutes of one another. It can be real or artificial. The demand curve monopolistic firms face is an elastic demand curve.

• Free Entry or Exit: There are no barriers to entry or exit, firms can easily enter or exit the market.

• Perfect Knowledge: Buyers and sellers are not aware, they lack some of the important knowledge which they must have. They are guided by advertising and other selling activities taken by the sellers.

• Selling Cost: In such markets, the firms have selling costs as the cost which is used for promoting the demand for its product.

Oligopoly: Such a market structure generally has one or few firms which are somewhat dependent on each other for taking decisions. The features of oligopoly market are:

• Few Dominant firms: There are only few firms and they produce a major share of the whole product.

• Mutual Dependence: As the market is dominated by a few firms, the price and output decision of one firm influence the profitability of the other firms which are remaining in the market.

• Barriers to entry: In such a market, barriers to entry just limits the threat of competition and facilitates the ability of a firm to earn long run economic

• Homogeneous or Differentiated good: Such a market has both types of products.

• Demand curve: Demand curve of such firms can never be estimated due to the mutual interdependence among firms

Herfindahl-Hirschman Index (HHI): It is defined as the summation of squares of each firm’s contribution out of total sale.
Based on the guidelines, if HHI value is below 1,000, then it is a competitive market. If it is between 1,000 and 1,800 then it is a less competitive market and if it is over 1,800 then it is an oligopoly.