Question

Business Scenario from Textbook BUSN11:

In the nation where Klaus lives, there are four very large manufacturers of furniture. Klaus and some very wealthy friends want to establish Number Five in the furniture manufacturing industry. Their strategy is quite simple and straight forward. They will quickly establish their new firm in the market and will sell all their products at lower prices than currently exist in the market. "We can have our company up and running within six months," Klaus confidently tells one of the prospective investors. An advisor says to Klaus: "These friends who want to back you financially, are they millionaires?" Klaus answers, "Not necessarily. They're just sharp business people who want to get a new firm started in an industry that is looking for some new ideas, some new blood." Soon the word has spread throughout the furniture industry that Klaus and friends are about to make a move. Then, Klaus gets a phone call: "Klaus, this is Ted Willkur of Willkur Furniture, and I'd like for you and me and some of my furniture colleagues from the other firms to have lunch together out at the country club. Interested?

Question: Which basic degree of competition are we seeing in this short case scenario? Explain why you have come to this conclusion.

Answer 1

It can't be perfect competition because there should be large number of buyers and sellers and same is the case with monopolistic competition. Further It cant be monopoly because there should have been only 1 seller.

It is an oligopoly with few, 4 large players who sell identical or differentiated products and dominate the market. Even though Klaus thinks that it is easy to enter, it is not so because the entry to market requires a lot of funds and is easy only for millionaires as it can be implied from the question of the investor.

Further, the phone call received by Klaus, is an indication of collusion or a cartel which is pretty common in Oligopoly. Therefore it can be safely said that it is an Oligopolist market