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Economics:

10th Edition
BOYES + 1 other
Publisher: Cengage Learning
ISBN: 9781285859460

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BuyFindarrow_forward

Economics:

10th Edition
BOYES + 1 other
Publisher: Cengage Learning
ISBN: 9781285859460
Chapter 26, Problem 4E
Textbook Problem
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Why might some people claim that the breakfast cereal industry is monopolistically competitive but that the automobile industry is an oligopoly? In both cases, about eight to ten firms dominate the industry.

To determine

To explain:

The reasons for breakfast cereal industry is regarded as monopolistically competitive while automobile industry is regarded as an oligopoly, given that both industries have only eight to ten players.

Explanation of Solution

Certain features of each of the market structures are as discussed below.

The features of oligopoly are:

  1. few sellers exist
  2. products may be differentiated or homogeneous
  3. most of the industry output is by a few firms
  4. there exists advertisement and selling costs
  5. strategic interdependence of firms
  6. there exist natural or technical barriers to entry
  7. kinked demand curve due to interdependence among firms
  8. A price decrease is followed by the competitor but a price increase is not followed.
  9. Supernormal profits

The features of monopolistic competition are:

  1. existence of large number of sellers
  2. free entry and exit of firms
  3. products are differentiated
  4. existence of selling costs
  5. cross-price elasticity of demand is high but not very high
  6. only normal profits in the long run

Breakfast cereal is a good that can have product differentiation but not to a great extent...

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