Question

The model of competitive markets relies on these three core assumptions: 1. There must be many buyers and sellers—a few players can't dominate the market. 2. Firms must produce an identical product—buyers must regard all sellers' products as equivalent. 3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry. The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry. Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not. Is the scenario Competitive? Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take—if they decide it's worth taking a taxi, they flag down the nearest one. Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug.

Answer 1

Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take—if they decide it's worth taking a taxi, they flag down the nearest one. : not a perfect competition , only two companies have market power .

Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks : Perfectly competitive , many sellers , identical products , free entry and exit in sock market .

In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. : Not competitive , market power exists , non-identical products .

The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug. : Monopoly market , only 1 firm .