2009 Fall - Mid-Term Test – October 21st, 2009
SHORT ANSWER QUESTIONS - MODEL ANSWERS
Question 1 5 marks
Give an example of an oligopoly market. Explain and justify your choice by identifying at least four features of an oligopoly and showing how each feature is present in the market you identify.
You must explain and justify your response.
Any industry that is a suitable example of an oligopoly or any product sold into an oligopoly market will do. In Canada, prominent examples would include:
- the "Big 5" banks (Royal, TD, CIBC, Bank of Montreal, Scotiabank)
- Cell phones (Rogers, Bell, Telus)
- "Big 3" North American auto manufacturers (GM, Ford, Chrysler)
- Airline Companies (Air Canada, West Jet, Porter)
Note: No marks are awarded merely for naming an industry. The marks are awarded for the explanation and justification. Without an explanation or justification that demonstrates that you understand the features of an oligopoly the name of an industry is simply an uninformed and unexplained guess
Features of an oligopoly market are:
- a relatively SMALL number (perhaps 3 - 6) of suppliers or sellers.
- the relatively small number of suppliers are LARGE (Large in any number of ways, i.e capital intense, large $$ value of assets, large number of employees, etc.)
- there are BARRIERS TO ENTRY to get into the industry (large benefits from economies of scale, capital intensity, a limited supply of factors of production, etc.
- intra-industry rivalry is INTENSE, i.e.they all observe each others pricing and product offerings and a move by one firm tends to bring a quick competitive response from the others.
- Often there is a lot of BRANDING (distinctive colours, logos, slogans, etc) in an attempt to DIFFERENTIATE.
A listing of 4 or more of these features will get you a "good" mark, say, 3 – 4 out of 5
To get an excellent mark (4 or better) the features should be related back to the industry.
Question 2 5 marks
Sunny was finishing high school in Ontario. During Grade 12, she had learned a little bit about different “degrees of competition”. One day, Sunny was talking to her Guidance Teacher about her choices of which university she might attend.
“Mrs. Singh” she asked her teacher “is the market for University education perfectly competitive, monopolistically competitive, an oligopoly or a monopoly?”
“Well” her Guidance Teacher replied “it all depends…..”
Why did Mrs. Singh tell Sunny that “it all depends….”? What does it “depend” on?
The purpose of this question is to test your understanding of "markets" and the features of various degrees of competition within markets.
The "degree of competition" reflects a buyers' ability to shop around, or choose, between various suppliers. The "degree of competition" also reflects an individual supplier's ability to differentiate themselves, and to determine or set the price of their product.
Those who wrote that a University is not a business do not understand the concept of markets. A university is offering a service (an education) and is hoping to attract the brightest tuition-paying students. Universities are competing with each other for students, including foreign students who pay higher tuition fees than domestic students. The fact that Canadian universities are not "businesses" i.e. their ultimate aim is not to make a "profit" for their owners, is completely irrelevant.
Sunny’s high school guidance teacher said that the type or degree of competition for University education “depends….”. The reason she could not give Sunny a clear and definitive answer is: the degree of competition for most products or sewrvices depends on the perception of the buyer, and on the buyer’s ability to find alternatives.
If Sunny was an A+ student, and a Scholarship winner, and her family could give her generous