Which of the following may transform an industry from oligopoly to monopolistic competition?

• A. A merger between the largest firms in the industry
• B. Barriers to entry becoming higher
• C. Collusion among existing firms to set prices
• D. An increase in the number of firms offering differentiated products

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the characteristics of an oligopoly and monopolistic competition. Oligopoly is a market structure with a few large firms dominating the industry, often with significant barriers to entry. Monopolistic competition has many firms offering differentiated products with relatively low barriers to entry.
2. Step 2: Identify what changes can shift the market structure from oligopoly to monopolistic competition. This involves increasing the number of firms and ensuring product differentiation, while reducing barriers to entry.
3. Step 3: Analyze each option: A merger between the largest firms would reduce the number of firms, reinforcing oligopoly rather than moving to monopolistic competition.
4. Step 4: Barriers to entry becoming higher would make it harder for new firms to enter, maintaining or strengthening oligopoly, not shifting to monopolistic competition.
5. Step 5: Collusion among existing firms to set prices maintains oligopoly behavior by reducing competition, so it does not lead to monopolistic competition. Therefore, an increase in the number of firms offering differentiated products is the key factor that transforms the industry from oligopoly to monopolistic competition.