Q18 in Reading 13 states this :
In an industry comprised of three companies, which are small-scale manufacturers of an easily replicable product unprotected by brand recognition or patents, the most representative model of company behavior is:
A) Oligopoly
B) Perfect competition
C) Monopolistic
Right answer is B. Perfect competition. The justification was this:
The credible threat of entry holds down prices and multiple incumbents are offering undifferentiated products.
Isn’t perfect competition a market with many sellers and buyers. How can we talk about a perfect competition when there is only 3 sellers?
Thanks guys
First, it should be “an industry composed of three companies” or “an industry comprising three companies”; I wish that people would learn what the word “comprise” means.
Second, you don’t need many buyers; oligopoly, perfect competition, and monopoly describe the nature of the sellers in a market, not the buyers.
Third, it isn’t necessary to have many sellers actively selling in a market to have perfect competition; the threat of many sellers who can easily enter the market is sufficient. As long as the products being sold are essentially identical and the sellers are price takers, perfect competition is an appropriate description.
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to add to Magician’s point, I think that the key word here is “easily replicable”. Oligopoly and monopol competition wouldn’t be easily replicable as they use differentiation. Tricky question!
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As weird as it may sound, “many” could mean anything more than 2. A monopoly and duopoly characterising 1 and 2 companies respectively. The question gives you a hint by using “easily replicable product”, which implies that it is “undifferentiated” (this should give you a hint), plus it goes on to say that it is “unprotected by patents or brand recognition”, this implies that “free entry and exit” is possible. These 2 characteristics should ideally set you onto perfect competition because monopolistic competition has the feature of differentiated products, which clearly isn’t the case here. Similarly, an oligopoly is characterised by certain restrictions on entry and exit as well as the existence of some product uniqueness that is generally protected by patents or trademarks.