Which market structure most accurately characterizes the automobile industry?

• A. Oligopoly
• B. Perfect competition
• C. Monopolistic competition
• D. Monopoly

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the characteristics of each market structure: Perfect competition involves many firms selling identical products with no barriers to entry; Monopolistic competition has many firms selling differentiated products with low barriers to entry; Monopoly is a single firm with significant barriers to entry; Oligopoly consists of a few large firms dominating the market with significant barriers to entry.
2. Step 2: Analyze the automobile industry by identifying the number of major firms. Notice that the industry is dominated by a few large companies rather than many small ones.
3. Step 3: Consider product differentiation. Automobiles are differentiated by brand, features, and quality, which suggests some level of product differentiation but not to the extent of monopolistic competition where many firms compete.
4. Step 4: Evaluate barriers to entry. The automobile industry requires substantial capital investment, technology, and regulatory compliance, which create high barriers to entry, limiting the number of firms.
5. Step 5: Conclude that the automobile industry fits the oligopoly market structure because it is dominated by a few large firms, has differentiated products, and significant barriers to entry.