Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers a few players can't dominate the market.
2. Firms must produce an identical product buyers must regard all sellers' products as equivalent.
3. Firms and resources must be fully mobile, allowing for free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug.

A. yes, meets all assumptions
B. no, no free entry
C. no, not many sellers
D. No, not an identical product

In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed.

A. yes, meets all assumptions
B. no, no free entry
C. no, not many sellers
D. No, not an identical product

In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors.

A. yes, meets all assumptions
B. no, no free entry
C. no, not many sellers
D. No, not an identical product

Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.

A. yes, meets all assumptions
B. no, no free entry
C. no, not many sellers
D. No, not an identical product