CFA EOC Reading 16 Question 18

CFA Level I Economics
#1

HI, Can someone please explain to me reasoning behind below question in CFA book EOC Reading 16. Q 18

In an industry comprised of 3 companies, which are small-scale manufacturers of an easily replicable product unprotected by brand recognition or patents, the most representative model of company behaviour is:

Answer in th book describes this as perfect competition, however I seem to understand that perfect competition has many firms as participants, so 3 firm industry indicates that it should be Oligopoly - please help.

Thanks

#2

The key phrases are: (1) small scale mfg (2) easily replicable product unproteced by brand recognition or patents These are not the trademarks of an oligopoly at all.

#3

Agree with Kurt. If anybody can manufacture this product, because it has no barriers to entry and it’s not patented, then you can’t make an economic profit on it. As soon as you do, more people will jump on the bandwagon and your profit will disappear.

So in this sense you’re a price taker (instead of a price maker). You don’t dictate the price to your customers. The customers choose the price they’re willing to pay, and you can take it or go out of business.

Sounds like a perfect competition.

#4

oligopoly is where a few manufactures exist and form cartels i.e groups to maximise profits by eliminating competitive policies…

#5

For perfect competition you don’t need many competitors; it can be sufficient to have many _ potential _ competitors. Here, because of ease of entry, there may be only three competitors, but there could be hundreds of potential competitors; that’s sufficient.

My pleasure.

#6

You do not need cartels (or collusion) to have an oligopoly.

#7

thats whats the defining feature of an oligopoly???

#8

The primary defining features are:

  • few firms
  • high barriers to entry.

Secondary features are:

  • the products can range from good substitutes for each other to extremely differentiated
  • the nature of the competition can be based on price, features, or marketing
  • individual companies’ pricing power can range from small to significant
#9

Neither a brand name nor a patent is necessary for an oligopoly.

Brand names are common, but not necessary.

Patents are less common, and also unnecessary.