Characteristics of monopolistic competition Which assumption is part of the model of monopolistic competition? Velg ett alternativ: There are few buyers and sellers. Firms make identical products. There is no collusion among firms. There are significant barriers to entry into the market.
The correct answer and explanation is :
Correct Answer: There is no collusion among firms.
Explanation (300 words):
Monopolistic competition is a market structure characterized by a large number of firms that sell similar but not identical products. One of the key assumptions of this model is that there is no collusion among firms. This means that each firm acts independently and does not coordinate prices or output decisions with competitors.
In monopolistic competition, firms have some degree of market power because their products are differentiated. This differentiation may be based on brand, quality, features, or customer service. However, the products are close enough substitutes that the pricing power of each firm is limited. If one firm raises its price significantly, consumers can switch to a competitor’s product, making the demand for each firm’s product relatively elastic.
Other assumptions of monopolistic competition include:
- Many buyers and sellers: No single buyer or seller can control the market price.
- Free entry and exit: In the long run, firms can enter or exit the market easily, which ensures that economic profits tend toward zero.
- Product differentiation: Each firm offers a product that is slightly different from its competitors’, which creates a niche market for each.
The incorrect alternatives highlight characteristics not associated with monopolistic competition:
- “There are few buyers and sellers” describes an oligopoly or monopoly, not monopolistic competition.
- “Firms make identical products” is a trait of perfect competition, where no product differentiation exists.
- “There are significant barriers to entry” is typical of monopolies or oligopolies, whereas monopolistic competition assumes low or no barriers to entry.
Thus, the absence of collusion—combined with product differentiation, many sellers, and easy market entry—makes monopolistic competition a unique and realistic model of many real-world markets, such as restaurants, clothing brands, and service providers.