Think of a good that you have recently purchased. Identify the market structure that the firm...

Think of a good that you have recently purchased. Identify the market structure that the firm selling the good operates in. Describe the characteristics of the market structure

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Expert Solution

The good purchased is soap. There are several brands of soaps in the market. Each of them have a differentiated product. This type of market is called monopolistic competitive market.

Let us define the basic characteristics of this market

1) large number of sellers

The sellers are in huge numbers but sell differentiated products ie the products sold are not homogeneous. This is true in case of soaps.

2) Differentiated product

All the soaps are differentiated by either the quality(could be germ protecting or could be for soft skin etc, they target different areas), are different in terms of brands and symbols used. Also these are not perfect substitutes of each other.

Eg: a person using brand A of soap would not have the same utility if he is forced to use brand B. This means that these are not perfect substitutes , rather close substitutes.

These type of market have the sellers as the price maker ie they have the power to set their own prices.

3) Free entry and exit

The entry and exit in monopolistic competitive market is free. The firms can enter and exit without any barriers. If the industry is making supernormal profits, more firms tend to enter, while when the industry is experiencing losses, firms tend to exit.

4) Decision making

Each of the firm in monopolistic competitive market has the right to decide and set the prices and outputs. The decision is made by the firms themselves and they are free to exercise it depending on the rivals behavior and market conditions.

(You can comment for doubts)

Rahul Sunny answered 11 months ago

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