Chapter 12:monopolistic Competition , Microeconomics, Sixth Edition, Robert S. Pindyck, Daniel L. Rubinfield

Front 1

monopolistic competition

Back 1

market in which firms can enter freely, each producing its own brand or version of a differentiated product

Front 2

oligopoly

Back 2

market in which only a few firms compete with one another, and entry by new firms is impeded

Front 3

cartel

Back 3

market in which some or all firms explicitly collude coordinating prices and output levels to maximize joint profits

Front 4

How do cartels differ from monopolies?

Back 4

a. because cartels rarely control the entire market, they must consider how their pricing decisions willa ffect noncartel production levels

b. because the members of a cartel are not part of one big company, they may be tempted to "cheat" their partners by undercutting prices and grabbing bigger shares of the market.

Front 5

characteristics of a monopolistically competitive market

Back 5

1. firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. In other words, the cross-price elasticities of demand are large but not infinite

2. There is free entry and exit: it is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their products become unprofitable.

Front 6

long-run equilibrium

Back 6

long-run equilibrium occurs when no firm has an incentive to enter or exit because firms are earning zero economic profit and the quantity demanded is equal to the quantity supplied

Front 7

nash equilibrium

Back 7

Set of strategies or actions in which each firm does the best it can given its competitor's actions.

Front 8

duopoly

Back 8

market in which two firms are competing with each other

Front 9

cournot model

Back 9

Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce

Front 10

reaction curve

Back 10

Relationship between a firm's profit-maximizing output and the amount it thinks its competitor will produce.

Front 11

Cournot equilibrium

Back 11

Equilibrium in the Cournot model, in which each firm correctly assumes how much its competitor will produce and sets its own production accordingly.

Front 12

Stackelberg model

Back 12

oligopoly model in which one firm sets its output before other firms do

Front 13

Bertrand model

Back 13

oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitor as fixed, and all firms decide simultaneously what price to charge.

FIRMS CHOOSE PRICES INSTEAD OF QUANTITIES

Front 14

noncooperative game

Back 14

Game in which negotiation and enforcement of binding contracts are not possible.

Front 15

payoff matrix

Back 15

table showing profit (or payoff) to each firm given its decision and the decision of its competitor

Front 16

prisoner's dilemma

Back 16

Game theory example in which two prisoners must decide separately whether to confess a crime; if a prisoner confesses, he will receive a lighter sentence and his accomplice will receive a heavier one, but if neither confesses,, sentences will be lighter than if both confess.

Front 17

price rigidity

Back 17

Characteristic of oligopolistic markets by which firms are reluctant to cchange prices even if costs or demands change.

Front 18

kinked demand curve model

Back 18

oligopoly model in which each firm faces a demand curve kinkend at the currently prevailing price: at higher prices demand is very elastic, whereas at lower prices it is inelastic.

Front 19

price signaling

Back 19

Form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit.

Front 20

price leadership

Back 20

pattern of pricing in which one firm regularly announces price changes that other firms then match.

(e.g. General Motors)

Front 21

dominant firm

Back 21

Firm with a large share of total sales that sets price to maximize profits, taking into account the supply response of smaller firms.

Front 22

cartel

Back 22

A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members.