CA Foundation · Business Economics · Price Determination in Different Markets
A smartphone brand operates in a market with many competing brands offering similar but differentiated features. Each brand has some control over its price, and firms compete through product innovation and advertising. However, no single firm dominates the market. Which market structure does this describe, and what is its defining characteristic?
This is monopolistic competition, characterized by many firms selling differentiated products, each with some pricing power. Firms compete through product innovation, advertising, and branding rather than competing solely on price, as in perfect competition.
- AOligopoly; a small number of large firms with significant market power and interdependence
- BMonopolistic competition; many firms selling differentiated products with some individual price-setting powerCorrect
- CPerfect competition; free entry and exit with homogeneous products
- DMonopoly; one dominant firm controlling the majority of sales
Explanation
This describes monopolistic competition: many firms, differentiated products, free entry/exit, and individual price-setting power. Firms compete through differentiation (features, branding, advertising) rather than price alone. The market description explicitly mentions 'many competing brands' (rules out oligopoly and monopoly) and 'differentiated features' (rules out perfect competition, which requires homogeneous products). Oligopoly requires a small number of dominant firms with mutual interdependence, which contradicts 'many brands' and 'no single firm dominates'.
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