Question

Why might some people claim that the breakfast cereal industry is monopolistically competitive but that the automobile industry is an oligopoly? In both cases, about eight to ten firms dominate the industry.

Short answer

Question: Explain why some people might claim that the breakfast cereal industry is monopolistically competitive while the automobile industry is an oligopoly. Answer: Some people might claim that the breakfast cereal industry is monopolistically competitive because there are many sellers providing a wide variety of differentiated products like different flavors, nutritional content, branding, and packaging. In contrast, the automobile industry is considered an oligopoly because it is dominated by a few firms with a high degree of interdependence, producing vehicles with similar performance, technology, and components. Additionally, there are significant barriers to entry in the automobile industry, such as high capital investments and complex supply chain networks.

Step-by-step solution

Understand the characteristics of monopolistic competition

In monopolistically competitive markets, there are many sellers each producing a differentiated product. Here, the firms have some control over the prices they charge, and each firm's products are considered close substitutes for one another. They are not perfect substitutes due to differences in branding, quality, or other factors, hence, the competition between these firms is not purely based on price.

Understand the characteristics of oligopoly

In an oligopoly, few firms dominate the market. These firms may offer similar or differentiated products. The key feature of an oligopoly market structure is the high degree of interdependence between the firms, meaning that any decision made by one firm will directly impact the other firms in the market. Barriers to entry are often high in an oligopoly, thus discouraging new firms from entering the market.

Analyze the breakfast cereal industry

Although there are eight to ten firms dominating the breakfast cereal industry, they offer a wide variety of differentiated products. Each firm produces cereals differing in flavor, nutritional content, branding, and packaging. Thus, it is reasonable for people to claim that the breakfast cereal industry is monopolistically competitive due to the presence of many sellers providing differentiated products with some level of control over their prices.

Analyze the automobile industry

The automobile industry is dominated by around eight to ten firms worldwide, but unlike the breakfast cereal industry, there is a higher degree of interdependence between these firms. The automobile firms produce vehicles of various types like sedans, hatchbacks, SUVs, sports cars, and more. However, the vehicles produced by different automobile companies are often very similar in terms of performance, technology, and components. Furthermore, there are significant barriers to entry in the automobile industry, such as high capital investments and complex supply chain networks, which discourage new firms from entering the market. Therefore, some people might claim that the automobile industry is an oligopoly due to its characteristics. By understanding these differences, it becomes clear why some people might claim that the breakfast cereal industry is monopolistically competitive, while the automobile industry is an oligopoly.