Answer to Question #97829 in Microeconomics for Daniel Balinne

Question #97829
Firms like Papa John’s, Domino’s and Pizza Hut sell pizza and other products that
are differentiated in nature. While numerous pizza chains exist in most locations, the
differentiated nature of these firms’ products permits them to charge prices above the
marginal cost. Given these above observations, is the pizza industry most likely a
monopoly, perfectly competitive, monopolistically competitive or an oligopoly
industry? How will your answer change if “numerous” is interpreted to mean 10?
Expert's answer

Answer 1: Monopolistic competitive.

  • Monopolistic competitive market: This market has large number of buyers and sellers and has barriers to enter and exit from the industry. They offer similar products but not perfect substitutes to the market. There is a product differentiation by using strategies like packaging, labelling, promotion and etc. Markets in the industry have kind of power to do changes in their prices. Monopolistic competitive market choose profit maximising price and quantity.

Answer 2: If “numerous” pizza chains is interpreted to mean 10 the market type change in to an oligopoly market.

  • Oligopoly market: This is in between monopoly and monopolistic competitive markets. Has few number of suppliers. Barriers to entry to the industry. High competition. The markets in the industry are highly depend on each other. Action of one firm will directly influences by other firms in the industry. They use fixed prices or leader prices. If the leader’s price change, other firms will change their prices accordingly. 

  • Monopoly Market : Market and the industry is the same unit in monopoly market. There is only on supplier in the market and has a barrier to entry to the industry. Their products have no similar substitute in the industry and object is to profit maximisation. They sell their products in different prices at different market while they have same cost on each product (specially the services).

  • Perfectly competitive market: This type of market has large number of buyers and sellers and has a barrier to entrance and exist to the market. They provide homogeneous products and have a single equal price. They are selling at the same price in the market because one single seller only receive very low market share In the industry. One supplier can’t impact on the price of the industry.

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