Question

Consider the markets for tap water, bottled water, cola, and beer. Assume there is only one provider of tap water, bottled water manufacturers use advertising to differentiate their products, cola producers engage in strategic pricing behavior, and the beer market is largely controlled by only a few firms. Classify the market for each of the following drinks as either monopoly, oligopoly, monopolistic competition, or perfect competition.

Monopoly Oligopoly Monopolistic Competition Perfect Competition
Tap water
Bottled water
Cola
Beer

Answer 1

Tap water ⇒ Monopoly

In a monopoly, there is only one supplier of a certain good or service. Tap water is therefore a monopoly as only one provider supplies it.

Bottle water ⇒ Monopolistic competition

In a monopolistic competition, similar but differentiated products are supplied. As bottled water is differentiated by advertising, it must exist in a monopolistic competition.

Cola ⇒ Oligopoly

An oligopoly is controlled by a few firms who have to engage in strategic planning behavior in order to sell their goods. This means that they would either lower prices to match competitors or collude with them to ensure stable prices.

Beer ⇒ Oligopoly

In an oligopoly, the market is controlled by a few firms who have an incentive to collude to set a certain price because a price war would be bad for all the firms involved.