12 Market & market structure

Chapter Twelve Market & market structure

Self-assessment Questions

12.1 Reasons why video rental shops are not operating under perfect competition include:

1) The goods and services sold are not homogeneous – these shops differ in their locations,
terms of video rental services and prices.

2) There is no perfect market information

3) Some sellers can affect the market price – sellers like Blockbusters take up a large fraction
of the market output. They can affect the market price by changing their supply.
(Any two of the above)

12.2 A monopolist still faces competition. There are at least two types of competition that it faces:

1) competition from substitutes (other than close substitutes) for his goods,
2) competition for inputs that he needs in production.

12.3 False! Even if there are hundreds of sellers, a market can still be described ‘oligopolistic’ if it
is dominated by several big sellers. The banking industry in Hong Kong is a good example.

Multiple Choice Questions

1 D 2 C 3 C 4 C 5 B
6 A 7 B 8 D

1 The Mass Transit Railway Corporation used to be a public corporation. Since going public, it has
been transformed into a public (listed) company.

3 There are a large number of sellers under monopolistic competition, but an oligopoly is
dominated by several sellers only.

Hence, other things being equal, when an industry changes from monopolistic competition into
an oligopoly, we expect the number of sellers to fall.

5 Option (D) is wrong. There is no guarantee that a monopoly must be able to make profits.

Short Questions

9(a) The selling of cakes and pastries belongs to tertiary production.

9(b)(i) The Maxim’s and Saint Honore cake shops operate under an oligopoly as they are the two
dominant sellers in the industry.

Alternatively, it could also be argued that cake and pastry retailing belongs to monopolistic
competition.

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 12 Market & market structure

9(b)(ii) Features of oligopoly include:

1) the market is dominated by several large producers;

2) the sellers are interdependent, i.e. the actions of one seller will result in prompt
reactions from the others;

3) the goods sold are heterogeneous;

4) entry is restricted or difficult;

5) market information is imperfect.

(Any three of the above)

Features of monopolistic competition include:

1) there are numerous sellers in the market;

2) entry into the market is relatively easy;

3) the goods sold are heterogeneous;

4) market information is imperfect.

(Any three of the above)

Structured Essay Question

10(a)(i) Oligopoly.

10(a)(ii) The characteristics include:

1) several dominant sellers;

2) it is difficult to enter the market;

3) sellers are interdependent;

4) entry is restricted or difficult;

5) market information is imperfect.

(Any three of the above)

10(b) Oil storage plants operate on a larger scale than gas stations because they desire to benefit
from economies of scale, in particular technical economies.

10(c) If Caltex Oil lowers its price, it is mostly likely that its competitors will also lower their price.
This is because its competitors are worried that they will lose business to Caltex Oil if they do
not.

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 12 Market & market structure

10(d) Offering gifts is a way Caltex Oil can win more sales from its business rivals. It serves to
stimulate the demand for gasoline provided by Caltex Oil.

10(e) Caltex Oil operates its own gasoline stations to ensure that there will be sufficient market
outlets for its products.

New Introductory Economics 3rd Edition 31 © Pearson Education Asia Limited 2003
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