Market Structures: Competition and Monopoly: Question 1

Worked solution

Step 1: Count the number of firms and check how similar their products are

Bellcourt’s weekly market has eighteen dairies, including Solenne Dairy, all selling a very similar product: fresh milk. A market with a high number of firms selling closely similar goods is the first sign of a competitive market, not a monopoly. A monopoly would require Solenne Dairy to be the only seller.

Step 2: Check how much power Solenne Dairy has over its own price

The stem tells us that if Solenne Dairy charged much more than its rivals, customers would simply switch to a different dairy stall. This shows Solenne Dairy has very little power to set its own price above the going rate. A defining feature of a competitive market, where individual firms are disciplined by the presence of many close rivals.

Step 3: Rule out the other options

• A monopoly market (option A) would mean Solenne Dairy was the only supplier of milk at Bellcourt’s market, with no close rivals, the opposite of the eighteen-dairy scenario described.
• A market failure (option C) describes a market that misallocates resources, for example by over- or under-producing a good relative to its full costs or benefits to society, nothing in the stem describes this.
• A mixed economic system (option D) describes how an entire economy allocates resources, combining markets with government intervention. It is not a way of describing the structure of one particular market.

Final answer

With eighteen dairies selling a similar product, and little ability for any one dairy to raise its price without losing customers to a rival, Bellcourt’s milk market is a competitive market, option B.