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36 Cards in this Set
- Front
- Back
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Monopolistic Competition
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a common market structure where many competing producers sell products that are differentiated from one another products (ie. the products are substitutes, but are not exactly alike). Many markets are monopolistically competitive, common examples include the markets for restaurants, cereal, clothing, shoes and service industries in large cities.
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Characteristics of Monopolistic Competition
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-There are many producers and many consumers in a given market, and no business has total control over the market price.
-Consumers perceive that there are non-price differences among the competitors' products. -There are few barriers to entry and exit. -Producers have a degree of control over price. |
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Product differentiation in monopolistic competition
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-1. Products are different because consumers think they are different (i.e. Tylenol vs. Osco Brand Ascenomenophen)
-2. Pricing of one brand exerts a greater constraint on another brand's pricing when the two brands are close substitutes than when they are not. |
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Non-price competition
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a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship"
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Importance of Advertising in monopolistic competition
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because of the nonprice competition advertising is very important because that is the way to sell the product because lower prices cant do that.
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Product variety in monopolistic firms
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single-product firms
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Demand curve of monopolistic competition
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downward sloping
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Long Run Equilibruim in monopolistic competition
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AR = LRAC
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Short Run Equilibrium in monopolistic competition
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MR - AC - AR
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Profits of monopolistic competition in the short run and in the long run
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A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit.
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Monopolistic competition excess capacity
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in the long run
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Product development in monopolistic competition
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To keep earning an economic profit, a firm in monopolistic competition must be in a state of continuous product development.
New product development allows a firm to gain a competitive edge, if only temporarily, before competitors imitate the innovation. |
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Oligopoly characteristics
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1. few large producers
2. homogenous/differentiated products 3. Price maker, mutually interdependent 4. relatively high entry barriers |
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Examples of oligopolistic competitive firms
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Four companies (Tesco, Sainsbury's, Asda and Morrisons) share between them them 74.4% of the grocery market[4]
Scottish & Newcastle, Molson Coors, and Inbev control two thirds of the beer brewing industry. |
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Barriers to entry
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Entry barriers exist that allow a handful of firms to achieve economies of scales, but no more beyond that. Any new firms would have too small a market share and would have to produce at too high a price. Sometimes the cost of capital is too high and other times, ownership and control of the raw materials is a factor. Patents and brand loyalty are also barriers of entry into an oligopolistic market
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Formal and tacit collusion
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Collusion is a real threat in oligopolistic markets. Such collusion may be explicit in the form of formal agreements or understandings or it may be tacit. Although the consequences of both formal and tacit collusion are the same, they are treated differently under competition law.
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Covert Collusion
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Covert Collusion – firms meet secretly and fix prices; determine large customer bid strategies – Illegal under U.S. Anti-Trust Laws
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Incentive to cheat
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Firms participating in a cartel have a strong incentive to cheat by offering secret discounts to customers to increase sales. Where there are only a small number of firms it may be easier to detect cheating and ensure that the participants adhere to any cartel arrangement.
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Strategic Behavior
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Conscious behavior arising among a small number of competitors or players, in a situation where all are aware of their conflicting interests and interdependence of their decisions.
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Differentiated and homogeneous oligopoly
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An oligopoly may be categorized as either a homogeneous oligopoly or a differentiated oligopoly. In a homogeneous oligopoly the major firms produce identical products, such as steel bars or aluminum ingots. Prices tend to be uniform in homogeneous oligopolies. In a differentiated oligopoly, similar but not identical products are produced. Examples include the automobile industry, the cigarette industry, and the soft drink industry.
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Schumpeter’s view
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was that it simply failed to take the historical evidence into account.
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Economies of scale
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are the cost advantages that a business obtains due to expansion.
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Interindustry competition
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Competition that develops between companies in different industries. For example, an automobile company may compete with an aerospace company for a government manufacturing contract for a military subsystem.
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Herfindahl Index
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is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.
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International Cartels
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nternational commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC) are examples of international cartels which have publicly entailed agreements between different national governments.
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resource markets
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Markets that exchange the services of the four factors of production--labor, capital, land, and entrepreneurship. The buyer of factor services is business sector. The seller of these services is the household sector. The study of macroeconomics is concerned with imbalances in the resource markets, especially surpluses and the resulting unemployment of resources. The resource markets, also termed factor markets, are one of three primary sets of macroeconomic markets. The other two are product markets and financial markets.
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Derived demand
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where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed.
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Economic Rent
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the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use. There are multiple mechanisms that can create economic rent: political contrivance, network effect, monopoly power, star power, etc.
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Income effect
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the change in consumption resulting from a change in real income.
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Marginal Product
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the extra output produced by one more unit of an input
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Quintile
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is one fifth or 20% of a given amount
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Lorenz curve
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is a graphical representation of the cumulative distribution function of a probability distribution; it is a graph showing the proportion of the distribution assumed by the bottom y% of the values. It is a curve that illustrates income distribution.
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Gini Ratio
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is a measure of statistical dispersion, commonly used as a measure of inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income, while everyone else has zero income). The Gini coefficient requires that no one have a negative net income or wealth.
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Wealth
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the value of the assets at a certain moment in time
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Income
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Value of return on assets during a certain time.
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Income mobility
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the ability of an individual or family to improve their economic status, in relation to income and social status, within his or her lifetime or between generations.
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