Firm and Market structures LOS 16a

CFA Level I Economics
#1

Okay so there are 4 types of market structures and I’m hoping you will provide a real life example so that I can remember it easier

  1. Perfect competition: It sounds like this describin a commodity, such as coffee beans. How literal am I supposed to take it when they say “no differentiation between products”? Would orange juice be an example? Do we think the Dole brand is better than the store brand?

  2. What is monopolistic competition in real life? It says here that there is heavy advertising and low barriers of entry into the market. Would Nike vs. Under Armor be an example of that? Or would you consider that high barriers since it’s hard to get the kind of attention?

  3. An oligopoly is, according to the book, when there are few sellers and HIGH barriers to entry. The example I remember from 8th grade economics is auto-makers. Not every Tom Dick and Harry can slam down tens of millions of dollars to create a new car and auto plant.

  4. Monopoly- the book defines this as a single firm that is protected by very high barriers to entry. It uses “advertising to compete with substitute products”? That makes no sense to me - if you comprise the entire market, doesnt that mean that there are no substitutes by definition? Would Microsoft be considered to have a monopoly in the PC OS market, or is that untrue because anyone can install Linux? Or would Linux be considered an unrealistic substitute because you cant just have your college install a bunch of Linux machines because none of the laypeople/students would know how to use the PCs anymore?

What would the tablet market qualify as in the modern world? Would that be an oligopoly or monopolistic competition?

What about toothpaste? Would that be perfect competition or monopolisti competition?

#2

Perfect competition: Commodity like products, almost zero differentiation. Basic commodities such as Sugar, Wheat, Rice etc. are good examples.

How literal are you supposed to take it when they say “no differentiation between products"? depends upon the extent of differentiation and can the seller charge a premium on the basis of that differentiation.

Monopolistic competition: Here the focus is on differentiation. These companies usually have very high advertising expenditures to communicate what is different in their product. For example, Restaurant Industry, Cosmetic industry , Confectionary industry etc. Everybody is trying to tell what is different in their product.

Oligopoly: A group of very large sellers. Usually, they make cartels to avoid price wars and to avoid competition with each other. A classic example is the Oil cartel (OPEC), Soft drink industry, American Auto Industry is another example, as you have already mentioned.

Monopoly: Single seller, hence highly regulated by Government. e.g Utility companies.

They do advertising to make their products known to as many people as possible and not to compete with substitutes, because there would not be any like you said.

I would classify Microsoft as a monopolist in the pc os market. Imo Tablet market is an oligopoly. Although, there are many tablet makers but top 5-10 companies are dominating the market.

#3

Thanks, that makes a lot more sense.

Hopefully, the cfa test wont split hairs with something ambiguous like tablet makers