BAFB1023

MICROECONOMICS
TOPIC 8
MARKET STRUCTURE (OLIGOPOLY)

Question 1

Suppose the jeans industry is an oligopoly and each firm believes its rivals will not follow its
price increases but will follow its price cuts. Briefly explain the characteristics of jean
industry in this market.

_The oligopoly firms can affect each other as they are interdependent. Their product can be
differentiated in branding and homogeneous. If product is homogeneous, firm may compete
with each other by the price whereas if it is differentiated product, they may compete on the
quality and marketing. Oligopoly firm may collude to earn the positive profits or they will
compete with each other.

Question 2

Little Kona is a small coffee company that is considering entering a market dominated by Big
Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew
sets a high price or a low price:

Big Brew

High price Low price

Brew makes Brew makes

RM3 million RM1 million
Enter
Kona makes Kona losses
RM2 million RM1 million
Little
Kona

Brew makes Brew makes

Don’t
RM7 million RM2 million
Enter

Kona makes Kona makes

zero zero

a) Does either player in this game have a dominant strategy?

___________________________________________________________________
_Little Kona and Big Brew market structure are monopolistic competition because
their products are differentiated and they have their own strategy compete on the
product quality, price and marketing to gain the customer loyalty.

b) Big Brew threatens Little Kona by saying, “If you enter, we’re going to set a low price, so
you had better stay out.” Do you think Little Kona should believe the threat? Why or
why not?

_Firms that under monopolistic competition will not affect by the rival product price
when it is high or low this is because each firm has their own supporters on the goods
itself no matter the price increase or decrease.
____________________________________________________________________
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Question 3 (Topic 5, 6, 7 and 8)

Determine the market structure for the following cases and explain your reasoning:

a) The place where you live is like many other places, you and your friends have many
choices about where to go to get a haircut. The price you pay for a basic haircut
probably ranges from a few dollars at a discount establishment to many dollars at an
upscale salon.

Market structure: _monopolistic competition ________________

Explanation: _Both firms have their own supporters although they offering the same
haircut services. Some customer might prefer to spend more at upscale salon because
their preference of the hairdresser service and skills.

b) The four largest breakfast cereal companies (Kellogg, General Mills, Post, and Quaker)
were producing over 86 percent of the total amount of breakfast cereals in the United
States. These cereal producers spend a lot on advertising and use advertising as a
way to compete with one another.

Market structure: __perfect competition____________________

Explanation: _Perfect competition market structure has large number buyer and seller.
They are well informed the price of the goods although they are selling the same
category product but under different brand. Seller is the price maker as they can sell
the price higher as they like and the buyer is the price taker.

c) Beginning in the 1930s and throughout most of the 20th century, the De Beers company,
based in Switzerland and South Africa, controlled most of the world’s diamond supply.
Control of the supply of diamonds enabled De Beers to restrict the number of
diamonds offered for sale and sell them at higher prices than would exist under
competition.

Market structure: __monopoly______________________

Explanation: _The de Beers market structure is monopoly as it is the sole seller of the
diamonds. Because of the barrier to entry and legal restriction, the firm has the power
of price discrimination to different group of buyers.

***End of Exercise Questions***