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89 Cards in this Set

  • Front
  • Back
4 types of market structure

(& classified by?)
a) number of producers
b) whether the goods are identical or differentiated



3)monopolistic competition

4)perfect competition
differentiated goods
goods that are different but considered substitutable

*coke & pepsi*
single producer sells single undifferentiated product

*monopolies move up the demand curve, lowering Q & increasing P more than it would be under perfect competition*
few producers [more than 1 but not large #]
sell products that may be identical or differentiated
monopolistic competition
many producers each sell differentiated product

*producers of economics text books*
perfect competition
many producers each sell identical product
market power
ability of monopoly to raise price above competitive level by reducing output

*easily increases profit*

(oligopolists have market power as well)
barrier to entry
must exist for a monopoly to persist. keeps others from going into the business

FOUR TYPES of barriers:
1)control of scarce resources / inputs
2)economies of scale
3)technological superiority
[typically short run]
4)gov't created barriers
[patents / copyrights

as a barrier to entry
when avg total cost always falls as output increases

then firms grow larger... larger companies more profitable driving out smaller ones

*fixed cost in providing gas lines to towns ... only large companies can do it*

--Creates a "natural monopoly"
natural monopoly
monopoly created and sustained by economies of scale

(source is when large fixed costs are required)

-when price is greater than atc, ATC curve declines
monopolist demand curve
still, MR = MC at profit maximizing quantity

BUT for perfectly competitive firms (price takers) each firm faces horizontal perfectly elastic demand curve (even tho market curve is downward sloping)... cannot change price but can sell as much wanted at given price

MONOPOLIES face downward sloping demand curve bc their demand curve IS the market curve

MONOPOLIES still find MR = MC
bc increasing production has 2 opposing effects on revenue:
[one more unit sold increasing TR by price at which unit's sold]

*monopolies MR curve is always less than the demand curve bc of the PRICE EFFECT*
[monopoly's MR from selling addition unit always less than price monopolist receives for unit]
...unlike perfectly comp firms which MR & MP always equal
Quantity Effect & Price Effect
-at low output levels, Quantity Effect greater than price effect
[as monopolist sells more has to lower price on only few units so price effect is small]

-high levels of output price effect stronger than quantity effect
[as monopolist sells more now has to lower price on many units of output making Price Effect very large]
monopolies maximizing profit
if MR > MC then increases profit by producing more

if MR < MC then increasing profit by producing less

**MR = MC**

-monopolists take price effect into account
monoplies are a source of inefficiency
the losses to consumers are larger than gains to monopolist... leads to net losses for the economy
*which is why gov't's try to regulate them.
"public ownership"
the good being monopolized is supplied by the government

solves answer to problem of natural monopoly

-can set prices based on criteria of efficiency, rather than profit maximization.
"price regulation"
limits the price that a monopolist is allowed to charge

-comman answer to natural monopolies in the US
single-price monopolist
one that charges all consumers the same price

(as opposed to price discrimination)
price discrimination
most monopolies can increase profits by charging different customers different prices for the same good
perfect price discrimination
takes place when monoplist charges each consumer the max they're willing to pay
a firm in an an industry thats part of an oligopoly

(only a few sellers of both identical and differential products)

*have market power as well... aren't price takers**

-not necessarily large firms but few competitors
imperfect competition
when firms compete but also possess market power (enabling them to affect market prices)

2)monopolistic competition
most important source of oligopolies?
economies of sale

-giving larger producers cost advantage over smaller one
"4-firm concentration ratio"
what share of industry sales is accounted for by the top 4 firms?

*used to get a picture of market structure & also to determine oligopolies*
oligopoly when there are only 2 producing firms

(each known as a duopolist)
when duopolists cooperate to raise eachothers profits

*strongest form = cartel*
arrangement that determines how much each firm is allowed to produce

*type of collusion*

(among gov'ts rather than firms)

-problem = both firms would have incentive to cheat... lowering TR of firms combined, but raising the TR of the cheater... but if both cheated, both firm's TR's would fall
producing an additional unit of good (MR) has 2 effects:
1)quantity effect:
one more unit sold increases TR by the price its sold at

2)price effect:
to sell one more unit the monopolist must cut the market price on ALL units sold (BUT oligopolists only concerned w/how price effect effects their business.. .not the whole market)
---an oligopolist faces a smaller price effect than a monopolist... it always seeems profitable to increase production
*but if everyone thinks this way everyone's profit will be lowered
noncooperative behavior
when firms ignore the effects of their actions on eachother's profits

(an oligopoly going against an agreement)
when decisions of 2+ firms significantly affect each other's profits

(like oligopolies)
game theory
the study of behavior in situations of interdependence

*deals with situations in which the reward to a player (payoff) depends on actions of other players*
the reward received by a player in a game

(like profit earned by oligopolist)
payoff matrix
shows how the payoff to each of the participants in 2 player game depend on the actions of both

*helps analyze interdependence*

contains 4 boxes showing the profits of each firm for different Q's.
---both firms better off if they both choose the lower output; but in each ind. firm's interest to choose the higher output {Prisoner's Dilemma!}
"Prisoner's Dilemma"
game in which the payoff matrix implies:

1)each player has incentive (regardless of other player) to cheat and take action benefitting themselves at other firm's expense

2)when both players cheat, both are worse off than they would have been if neither had cheated.
dominant strategy
when it is the player's best action regardless of what action the other player takes
Nash Equilibrium


Noncooperative Equilibrium
thet result when each player chooses the action that maximizes their payoff
given the actions of the other players
ignoring the effects of their own action on the payoffs of the other players.
strategic behavior
taking account the effects of the action they choose today on the future actions of other players in the game

*1 type = "tit for tat"*
"tit for tat"
start off behaving cooperatively then do whatever the other player did in the previous period

*form of strategic behavior*

"if you behave cooperatively, so will i... if you cheat i wont be nice in the future."
tacit collusion
when firm slimit production then raise prices in a way that raises each others' profits... even though they haven't made a formal agreement

*when oligopolists expect to compete over an extended period of time each firm will often conclude its in their own best interest to be helpful to the other firms*

-results in a kinked demand curve
kinked demand curve
occurs when an oligopolist thinks they'll lose a great number of sales if they reduce output & increases price..... and will only gain a few sales if output is increased & price is lowered (away from tacti collusion outcome)

-kinked @ P & Q combo associated w/ tacit conclusion outcome
-demand curve flat at output less than Q* == if output below Q* does'nt expect rivals to reduce output as well --> loss of many sales
-demand curve sloped steeply downward at output greater than Q* === if produce more than Q* then rivals will also produce more and cut prices -->gain fewer sales
MC & MR curves
in context of a
Kinked Demand Curve
a portion of the MR curve is vertical (a break in the curve) (@ tacit collusion outcome pt)
--->2 MC curves pass thru the break in the MR curve... one responding to higher MC & one responding to lower MC

--->any MC curve in the break generates the same output level (Q*) [output's unresponsive to MC change in this range]

-if MC falls below break zone = faces break in collusion and increasing output
-if MC raises above break zone = faces breakdown in collusion & reducing output, raising price
-if MC changes w/i break producer leaves output unchanged rather than risking breakdown in collusion

***all when MC is beleived to be faced by that single producer***
anti-trust policy
efforts of the go't to prevent oligopoly industries from behaving like monopolies
Factors preventing
oligopolies (w/ tacit conclusions)
to push prices up to monopoly level
1)Large #s:
-the more firms in an oligopoly the less incentive of 1 firm to be cooperative
(low barriers to entry)

2)Complex Products & Pricing Schemes
-oligopolists usually sell many different products -- keeping track of them all makes it hard to see if firm is cheating on a tacit agreement

3)Differences In Interest
-differing perceptions about what is fair / in their best interest

4) Bargaining Power of Buyers:
-often oligopolists sell to large buyers, not ind consumers
--->have more bargaining power than an ind consumer would
"price war"
occurs when tacit collusion breaks down & prices collapse

-sellers try to put eachother out of business
-oligopolies charge pricces well below what a single giant firm would
"product differentiation"
firms make efforts to create perception that their product is different

-adding extras
-different designs
"price leadership"
one firm sets price first then other firms follow
"non-price competition"
firms that have a tacit agreement to not compete on price
engage in this

-adding new features to products
-large sums on ads
monopolistic competition
1)many competing producers
*many food court vendors

2)differentiated products
-distinct products
*cheap chinese, fast food burgers*

3)free entry / exit in the long run
*other fast food joints can join the food court if beleive it'll be profitable

-each producer has ability to set price... but is limited as to how high it can be set

-collusion doesn't exist

*restaurants* *gas stations*
product differentiation


monopolistic competition
-bc tacit collusion is impossible w/ so many producers
--->product differentiation only way monolistically competitive firms can gain market power

1)different style / type
-products are IMPERFECT substitues
*some will choose a more expensive meal if closer to their preferences

2)different location
-many choose closest seller, not cheapest (convenience)
*gas station more convenient near home or work

3)different quality
-consumers vary in what they're willing to pay for higher quality
*gourmet chocolate
Short-run Equilibrium


Monopolistic Competition
-# of firms taken as given

-to max profits MR = MC
-if at any Q of output ATC curve lies above the demand curve then there is NO WAY of firm to make a profit

-Profitability depends on relationship between demand curve & ATC curve

(Gen. traits on monopolistic comp graphs.. both short & long term)
-downward sloping demand curve & MR curve
-upward sloping MC curve
-[some fixed costs:] ATC is U-shaped
Long-Run Equilibrium


Monopolistic Competition
-reached only after enough time elapsed for firms to enter / exit the industry

-not in long run equilibrium til persistent losses eliminated by exit of some firms

-ENTRY of producer shifts demand & MR curve LEFT
-EXIT of producer shifts demand & MR curve RIGHT

-long run equilibrium when all firms earn 0 profit
("zero-profit equilibrium")

"monopolists w/o monopoly profits"
"Zero-Profit Equilibrium"
occurs in the long-run of a monopolistically competitive industry

-firms just manage to cover costs @ profit maximizing output Q's

-demand curve must be TANGENT to ATC curve
AT the profit maximizing Q (where MC = MR)

-PROFIT = new firms enter shifting demand curve of all existing firms left until profits are eliminated

-LOSS = existing firms exit & demand curve shifts right until all losses eliminated
Monopolistic Competition


Perfect Competition

[price, MC, & ATC]
1)price is higher than firm's MC
*want to sell more at going price*

2)Q firm produces is on downward sloping part of ATC (u)
---fails to produce enough to minimize ATC
{aka "excess capacity"

1)price received by firm = firm's MC @ that output
*don't care if they sell to you at going price (wheat)*

2)prodcue at bottom of ATC (u)
--firm produces Q that ATC is minimized at
"Excess Capacity"
firms in monopolistically competitive industries produce less than the output where ATC is minimized
when is advertising worthwhile?
only in industries where firms have some market power

--get more people to buy seller's product @ the going price
"brand names"
a name owned by a particular firm distinguishing its product from those of other firms
what competitors charge a price above MC
-monopolist competitors

marginal social COST of pollution
additional cost imposed on society as a whole by an additional unit of pollution
marginal social BENEFIT of pollution
additional gain to society from an additional unit of pollution
socially optinmal quantity of pollution
quanity of pollution society would choose if all costs and benefits were fully acccounted for

(upward sloping marginal social cost curve --- shows how marginal cost of addition unit of pollution varies w/quantity of emissions

marginal social benefit curve[MSB downward sloping bc progressively harder (& more expensive to achieve further reduction in pollution as amt falls]

-market by itself wont arive at socially optimal quantity of pollution
external costs


negative externalities
uncompensated cost that an ind or firm imposes on others

-most important = environmental costs

*choosing to drive during rush hr increases congestion & travel time of other drivers
external benefits


positive externalities
benefits an ind or firm confers on others w/o receiving compensation
external costs & benefits
Coase Theorem
in the presence of externalities an economy can always reach an efficient solution as long as cost to individuals making deal are low (transaction costs)

*externalities need not lead to inefficiency bc ind's have incentive to make mutually beneficial deals
transaction costs
the costs to individuals making a deal
"internalize the externality"
when ind's do take externalities into account when making decisions

*if externalities fully internalized outcome is efficient w/o gov't intervention*
Transaction Costs

preventing ind's from making efficient deals
1)cost of communication
-high is many ppl involved

2)costs of making legally binding agreement
-lawyers may be required

3)costly delays involved in bargaining
-both sides may hold out to try for more favorable terms
(increased effort, forgone utility)
"environmental standards"
rules protecting the enviro by specifying actions by producers & consumers

*rules making communities treat sewage*
emissions tax
tax that depends on the amt of pollution a firm produces
pigouvian taxes
tazxes designed to reduce external costs
tradable emissions permits
licenses to emit limited Q's of pollutants that can be bought & sold by polluters
marginal social cost of a good or activity
equal to MC of productoin + marginal external cost
technology spillover
external benfit results when knowledge spreads among ind's & firms
marginal social benefit of good / activity
marginal benefit to consumers + marginal external benefit
pigouvian subsidy
payment designed to encourage activities that yeild external benefits
industrial policy
policy that supports industries believed to yield positive externalities
"private good"
when a good is

2)rival in consumption

suppliers of the good can prevent people who don't pay from consuming it
"rival in consumption"
the smae unit of the good cannot be consumed by more than one person at the same time
the supplier can't prevent consumption of the good by people who didn't pay for it

*fire protection
*city of london improved the Great Stink
"nonrival in consumption"
more than one person can consum the same unit of the good at the same time

*TV show
Four Types of Goods:
-excludable & rival in consumption

-nonexcludable & non rival in consumption
*public sewer system

-rival in consumption
*clean water in a river

-nonrival in consumption
*payperview movies on TV
Free-Rider Problem
if a good is nonexcludable rational consumers won't be willing to pay for it
--no incentive to pay for their own consumption

--->RESULT: non-excludable goods suffer from inefficiently low production in a market economy
Private goods are the only goods that can be efficiently produced & consumed in a competitive market
they're excludable::
--producers can charge for them & therefor have an incentive to produce them

they're rival in consumption::
---its efficient for consumers to pay a + price (price = MC of production)
Public GOods
-nonexcludable & nonrival in consumption

*disease prevention
*nat'l defense
*scientific research
cost-benefit analysis
gov'ts estimate the social costs & benefits of providing a public goodq
common resource
good that is nonexcludable but is rival in consumption

*you can't stop me from consuming the good & more consumption by me means less of the good available to u

*stock of fish in limited area

-bc nonexcludable, ind's can't be charged for their use
-bc rival in consumption, use depletes resource making it unavailable to others
====>Subject to OVERUSE

*marginal social cost of my use is higher than my individual marginal cost
individuals ignore the fact that their use depletes the amt of resource remaining for others

-common resources suffer
3 ways to induce people to internalize the costs imposed on others by using COMMON RESOURCES
1)tax or otherwise regulate
-can impose a pigouvian tax

2)create tradable license system for right to use common resource

3)make excludable & assign property rights to some individuals
Artificially Scarce Good
-nonrival in competition
*payperview movies

-producers can charge for consumption
-MC of ind's consumption is 0

**the price the supplier charges exceeds MC**
---consumption inefficiently low
**ATC is above MC (price is above MC)