Question

1. Briefly discuss how differentiated products in a monopolistic competitive framework can arise.

2. Briefly describe what an oligopoly is, as well as the circumstances that could allow oligopolists to earn their highest profits.

Answer 1

ANSWER 1 -

It is the main characteristic of the monopolistic competition that there is product differentiation . Product differentiation means to make some amount of changes in the product so as to charge different prices from the consumers based on the characteristics of the product. When the same class of product has some amount of different qualities in every type of its product , it is called the product differentiation. The consumers are also ready to give up the different prices for the product which is known as the PRICE DISCRIMINATION. Hence the product differentiation and the price discrimination , both are the characteristics of the monopolistic competition . The product differentiation helps to earn some amount of profits to the monopolistic competition.

ANSWER 2 -

Oligopoly is the type of market in which some large producers come up together to establish a market and agree upon the price and the quantity to be produced. There is cut throat competition among the sellers or there is no competition. If the sellers agree upon the same price it is called the CARTEL. The market posses the kinked demand curve.

When the sellers decide the same price , none of the seller in the market is ready to sell the product at the lower prices than decided by the sellers mutually. Hence the price set is more than the original price which should be charged. In this way the consumers have to pay higher and this higher price is the profit for the sellers. Any seller who does not agree to the mutual price policy is thrown out of the market.