Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.

Explanation:

Pure monopoly: one firm; unique product: with no close substitutes; much control over price:

price maker; entry is blocked; mostly public relations advertising.

Monopolistic competition: many firms; differentiated products; some control over price in a

narrow range; relatively easy entry; much nonprice competition: advertising, trademarks, brand

names.

Oligopoly: few firms; standardized or differentiated products; control over price circumscribed by

mutual interdependence: much collusion; many obstacles to entry; much nonprice competition,

particularly product differentiation.

(a) Hometown supermarket: oligopoly. Supermarkets are few in number in any one area; their

size makes new entry very difficult; there is much nonprice competition. However, there is

much price competition as they compete for market share, and there seems to be no collusion.

In this regard, the supermarket acts more like a monopolistic competitor. Note that this

answer may vary by area. Some areas could be characterized by monopolistic competition

while isolated small towns may have a monopoly situation.

(b) Steel industry: oligopoly within the domestic production market. Firms are few in number;

their products are standardized to some extent; their size makes new entry very difficult; there

is much nonprice competition; there is little, if any, price competition; while there may be no

collusion, there does seem to be much price leadership.

(c) Kansas wheat farm: pure competition. There are a great number of similar farms; the product

is standardized; there is no control over price; there is no nonprice competition. However,

entry is difficult because of the cost of acquiring land from a present proprietor. Of course,

government programs to assist agriculture complicate the purity of this example.

(d) Commercial bank: monopolistic competition. There are many similar banks; the services are

differentiated as much as the bank can make them appear to be; there is control over price

(mostly interest charged or offered) within a narrow range; entry is relatively easy (maybe too

easy!); there is much advertising. Once again, not every bank may fit this modelâsmaller

towns may have an oligopoly or monopoly situation.

(e) Automobile industry: oligopoly. There are the Big Three automakers, so they are few in

number; their products are differentiated; their size makes new entry very difficult; there is

much nonprice competition; there is little true price competition; while there does not appear

to be any collusion, there has been much price leadership. However, imports have made the

industry more competitive in the past two decades, which has substantially reduced the

market power of the U.S. automakers.