Firms like McDonalds and Wendy sell hamburgers, salads, and other products that
ID: 1094955 • Letter: F
Question
Firms like McDonalds and Wendy sell hamburgers, salads, and other products that are differentiated in nature. While numerous fast-food restaurants exist in most locations, the differentiated nature of the firms products permits them to charge prices that are in excess of marginal cost. Given these observations, is the fast-food industry most likely a perfectly competitive industry, a monopoly, monopolistically competitive, or an oligopoly? Use the causal view of structure, conduct, and performance to explain the roles of product differentiation in the industry, and explain how the feedback critique applies in this context
Explanation / Answer
Firms like McDonalds and Wendy sell hamburgers, salads, and other products that are differentiated in nature. While numerous fast-food restaurants exist in most locations, the differentiated nature of the firms products permits them to charge prices that are in excess of marginal cost. Given these observations, is the fast-food industry most likely a perfectly competitive industry, a monopoly, monopolistically competitive, or an oligopoly? Use the causal view of structure, conduct, and performance to explain the roles of product differentiation in the industry, and explain how the feedback critique applies in this context
Monopolistically competitive. In a monopolistically competitive market, there are many firms, but each firm produces a differentiated product. According to the causal view, the structure of differentiated products causes firms to capitalize on the absence of close substitutes by charging higher prices.
According to the feedback critique, the conduct of firms may determine the market structure. The products of firms may be differentiated because of the conduct of firms in the industry. Examples of such conduct include advertising and other behavioral tactics that feedback into demand, causing consumers to view products as differentiated. Thus, it is not at all clear that differentiated products are a structural variable.
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