Monopolistic competition exists when there is one large firm in an otherwise perfectly competitive market?

Question

true or false?

Answer 1

True, in fact, the other example of Wal-Mart vs. a smaller business in a town is a good example.

Simply put, the small business does not have the selling power to have any sort of substantial impact on Walmart's revenue. Even if the small business sets the prices of its products lower than Wal-Mart, the smaller firm will run out of product and the rest of the consumers will go to Walmart anyway. In this example, Walmart probably sells 98-99% of the products in any particular market to the town anyway.

With this in mind, the smaller firms still must compete to see who can supply the remaining 1-2% to the town. For this reason, the smaller firms cannot grow, even though they sell out. The undercutting by the other competitive small firms is too harsh for another firm to start expanding.

Thus we have a scenario where the small firms compete not for the total market share, but for a fraction of it, while a monopolistic firm provides the remaining part.

Hope that example helps a bit.

Answer 2

That's a hard question because it doesn't say anything about price. The size of a firm doesn't necessarily matter, it's whether or not they can set the price in the market. I would say false because the question says an otherwise perfectly competitive market. If your teacher says it's wrong, tell her it was a bad question because it says nothing about price. HA!

Answer 3

can you say WalMart vs. neighborhood businesses