Question

Which market is the closest to having free competition? A. web search market B. cell phone supplier market C. auto manufacturing market D. sportswear manufacturing market

Short answer

D. sportswear manufacturing market

Step-by-step solution

- Understand Free Competition

Free competition, also known as perfect competition, is a market structure characterized by a large number of small firms, homogeneous products, no barriers to entry, and perfect information. Markets straying from these characteristics lean towards monopolistic or oligopolistic structures.

- Analyze the Web Search Market

The web search market is dominated by a few big companies like Google, Bing, and Yahoo. This indicates a lack of many small firms, suggesting that the web search market does not exhibit free competition.

- Analyze the Cell Phone Supplier Market

The cell phone supplier market is dominated by a few large players, such as Apple, Samsung, and Huawei. This market also faces significant barriers to entry due to high costs and technology complexity, meaning it does not have free competition.

- Analyze the Auto Manufacturing Market

Similar to the cell phone market, the auto manufacturing market consists of a few large firms like Toyota, Volkswagen, and General Motors, and has significant barriers to entry. This too is not a market of free competition.

- Analyze the Sportswear Manufacturing Market

The sportswear manufacturing market includes many firms both large and small, such as Nike, Adidas, alongside smaller brands. There are relatively lower barriers to entry, allowing more firms to compete. This market is closer to free competition compared to the other options.

- Conclusion

Based on the characteristics of free competition, the sportswear manufacturing market best meets the criteria compared to the other industries listed.

Key concepts

market structure

Market structure refers to the organizational characteristics of a market. It includes the number of firms, the nature of product differentiation, the ease of entry and exit, and the level of competition. These features decide how companies in the market will interact and set prices. Market structures range from perfect competition to monopoly. Key types of market structures include:

• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly

Understanding market structure helps explain different economic behaviors, such as pricing policies and business strategies.

perfect competition

Perfect competition, also known as free competition, is a market structure with several defining features.

• A large number of small firms
• Homogeneous products, meaning products are identical
• No barriers to entry or exit
• Perfect information, so everyone knows the prices and characteristics of the products

In a perfectly competitive market, no single firm can influence the market price. Firms are price takers, meaning they accept the market price set by supply and demand. This leads to efficient resource allocation, as goods are produced at the lowest possible cost and sold at prices reflecting true consumer demand.

barriers to entry

Barriers to entry are obstacles that make it difficult for new firms to enter a market. These barriers could be economic, legal, or technological.

• **Economic barriers**: High startup costs, economies of scale
• **Legal barriers**: Patents, licensing requirements
• **Technological barriers**: Need for advanced technology and expertise

Barriers to entry protect established firms from new competitors and can contribute to less competitive market structures like monopolies and oligopolies. In perfect competition, such barriers are minimal or non-existent, allowing easy entry and exit for firms.

oligopoly

An oligopoly is a market structure characterized by a small number of large firms that dominate the market. These firms produce similar or differentiated products and have significant market power. Several features define oligopolies:

• **Few large firms**: Often only a handful of major players
• **Interdependency**: Firms must consider the actions of their competitors when making decisions
• **Barriers to entry**: High entry costs and other barriers prevent new firms from entering easily

Oligopolistic markets, such as the auto and cell phone supplier markets mentioned in the earlier exercise, show strategic behavior like collusion or price setting. An oligopoly leads to higher prices and less consumer choice compared to more competitive markets.