Subject : International Economics
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
The general analysis of oligopoly is a complex and controversial subject because in oligopolies, thepricing policies of firms are interdependent. Each firm in an oligopoly will, in setting its price,consider not only the responses of consumers but also the expected responses of competitors.In monopolistic competition models, two key assumptions are made to get around the problem of interdependence.First, each firm is assumed to be able to differentiate its product from that of its rivals. That is,
because a firm’s customers want to buy that particular firm’s product, they will not rush t
other firms’ products because of a slight price difference. Product differentiation thus ensures that
each firm has a monopoly in its particular product within an industry and is therefore somewhatinsulated from competition.Second, each firm is assumed to take the prices charged by its rivals as given
that is, it ignores theimpact of its own price on the prices of other firms. As a result, the monopolistic competition modelassumes that even though each firm is in reality facing competition from other firms, each firm behaves as if it were a monopolist
—hence the model’s name.