Which type of firm has the most market power?

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BlackTom AI · Accepted Answer

Here is a breakdown of each answer choice to understand which firm type has the most market power.
Option a: A monopoly firm. This option identifies a single seller in the market with many barriers to entry, which grants that firm substantial market power, including the ability to set prices and restrict output. In most standard diagrams and theories, a monopoly faces no close substitutes and controls the market supply, giving it the greatest degree of influence over price among the options.
Option b: A firm in perfect competition. In perfect competition, there are many firms selling identical products, free entry and exit, and no single firm can influence the market price. Each firm is a price taker, and the market determines the price, which means very low or no market power for individual firms. This makes this choice clearly incorrect for the question about the most power.
Option c: An oligopoly firm. An oligopolistic market has a few large firms, and these firms do have more power than firms in perfect competition, but their power is constrained by mutual interdependence and potential competition from the other large firms. While they can influence prices to some extent, their power is generally less than that of a monopoly because competition among the few players still exists and potential entrants can limit price increases.
Option d: A firm in monopolistic competition. In monopolistic competition, there are many firms, each selling differentiated products. There is some market power due to product differentiation, but firms face downward-sloping demand and competition from many substitutes. Overall, the power is limited compared to a monopoly, since price and output are still influenced by other firms and close substitutes.
Overall, evaluating the levels of market power across these market structures, a monopoly firm possesses the highest degree of market power due to being the sole provider with high entry barriers and no close substitutes.

MUF0061 Economics Unit 1 - Semester 2, 2025 Video and Quiz: Introduction to Market Structures (10 - 15 minutes)

Which type of firm has the most market power?

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