Use the model of industrial organization characteristics to decide whether the f

Question

Use the model of industrial organization characteristics to decide whether the following firms are likely to be organized as monopolies, perfectly competitive, oligopolies or monopolistically competitive. Explain carefully why you chose what you chose.

a) A local band that plays for weddings, parties, and so on.

b) Minute Maid, a producer of individual serving-size juice boxes

c) Your local dry cleaner

d) A farmer who produces soybeans.

e) Your local hairdresser.

f) Also, that local hairdresser tells you that he is making a profit and expects to retire in 4 years. According to the market structure you chose from above, do you expect this to last? What do you think might happen in the long run?

Explanation / Answer

(a)

The three conditions for monopolistic competition are

(1) a large number of producers,

(2) differentiated products, and

(3) free entry and exit.

Since, there are many bands that play at weddings, parties, and so on. There are no significant barriers to entry or exit. And products are differentiated by quality (for instance, some bands have better musicians or better electronic equipment) or by style (for instance, different bands play different types of music). Since, all three conditions for monopolistic competition are fulfilled, hence, local band that plays for weddings, parties can be said to be organised in monopolistic competition.

(b)

The industry for individual-serving juice boxes is dominated by a few very large firms (for example, Minute Maid and Welch’s), and there are significant barriers to entry, because of the large costs (for example, advertising) involved in gaining any market share of the national market. Products are, however, differentiated—in some cases, the only differences are in the minds of consumers. Because of the small number of competitors, the industry is closer to oligopoly.

(c)

There are a large number of dry cleaners, and each produces a product differentiated by location: customers are likely to prefer to use the dry cleaner closest to their home or workplace. Finally, there are no significant barriers to entry. This is a monopolistically competitive market.

(d)

There are a large number of soybean farmers, and there is free entry and exit in this industry. However, soybeans are not differentiated from each other—they are a standardized product. No individual soybean farmer has market power. This industry is therefore a perfectly competitive industry.

(e)

Since, there are many local hairdresser. There are no significant barriers to entry or exit. And products are differentiated by quality (for instance, some local hairdresserhave better equipment) or by style . Since, all three conditions for monopolistic competition are fulfilled, hence,local hairdresser can be said to be organised in monopolistic competition.

(f)

Since this hairdresser (and all other hairdressers) makes a profit , there will be entry into this industry. As more hairdressers open shops in town, demand for the typical existing hairdresser will fall—the demand curve and marginal revenue curve shift leftward. This will continue to the point at which no hairdresser makes positive profit. This eliminates the incentive for further entry into the industry, and long-run equilibrium is reached.

The best the typical hairdresser can do is to price equal average total cost , each hairdresser will make exactly zero profit.

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