14 In December 2012, a law went into effect in Australia that requires cigarette manufacturers to package cigarettes in plain brown packaging with the name in a prescribed font. This law would make the market for cigarettes:
A. More concentrated as measured by the Herfindahl index
B. More like a monopolistically competitive market
C. More like a monopoly market
D. More like a perfectly competitive market

Question

14 In December 2012, a law went into effect in Australia that requires cigarette manufacturers to package cigarettes in plain brown packaging with the name in a prescribed font. This law would make the market for cigarettes:
A.    More concentrated as measured by the Herfindahl index 
B.    More like a monopolistically competitive market
C.    More like a monopoly market
D.    More like a perfectly competitive market

BlackTom AI · Accepted Answer

The question asks how plain packaging laws for cigarettes in Australia would affect the market structure.
Option A: 'More concentrated as measured by the Herfindahl index' — Plain packaging reduces brand differentiation and advertising, which can intensify price and non-price competition, but it does not inherently increase market concentration. The HHI would rise only if market shares became more uneven or fewer firms dominated; plain packaging is more likely to compress product differentiation rather than create consolidation, so this option overstates an effect on concentration.
Option B: 'More like a monopolistically competitive market' — In a monopolistically competitive market, many firms sell differentiated products. Plain packaging reduces product differentiation through branding, which moves the market away from high differentiation. Therefore, this option mischaracterizes the likely effect: it would lessen differentiation rather than preserve the typical monopolistic competition structure.
Option C: 'More like a monopoly market' — A monopoly implies a single firm or very dominant firm with significant barriers to entry. Plain packaging does not create barriers that would lead to a single seller; it reduces differentiation and advertising, not the number of sellers or the ability of new firms to enter. This option is inconsistent with the likely outcome.
Option D: 'More like a perfectly competitive market' — Perfect competition features many sellers offering essentially identical products with easy entry and exit, and price-taking behavior. By standardizing packaging and reducing branding, plain packaging narrows perceived differences between brands, moving consumer choice toward price and availability rather than branding, which aligns with the traits of more price-based competition and less product differentiation. While real-world cigarette markets are not perfectly competitive, this reform pushes the market closer to the characteristics of perfect competition than the other options.
In summary, each alternative is evaluated against the economic implications of reducing product differentiation through plain packaging: concentration and monopoly-style conditions are unlikely outcomes, while the shift toward less differentiated competition is most consistent with moving toward a more competitive structure, akin to what option D describes. The reasoning rules out the first three choices by pointing out the mismatches between branding restrictions and the definitions of concentration, monopolistic competition, and monopoly, respectively.

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