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23 Cards in this Set
- Front
- Back
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Perfect Competition |
Many firms produce identical products and competition forces them all to sell at the market price. (Wheat, tomatoes, etc) - Very low barriers for entry - Firms compete for sales only on basis of price - Perfectly elastic (horizontal) demand curves |
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Monopolistic Competition |
Products are not identical. Each firm differentiates through quality, features, marketing. (toothpaste) - Demand is elastic, but not perfectly elastic - Low barriers for entry |
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Oligopoly |
- Few firms competing (auto industry) - Each firm must consider the actions and responses of other firms in setting price and business strategy (interdependent) - High barriers to entry |
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Monopoly |
- Single seller of a product with no close substitute - Very high barriers to entry - Protection from copy right and patents - Usually supported by government |
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Natural Monopoly |
Having 2 or more producers would result in significantly higher cost of production and be detrimental to consumers (electric, other utilities) |
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Shutdown Point |
Firm is only just covering its variable costs (P=AVC) |
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Short-Run Supply Curve (firm) |
Marginal Cost (MC) line above the average variable cost curve. |
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Short- Run Market Supply Curve |
The horizontal sum of the MC curves for all firms in a given industry. |
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Kinked Demand Curve |
Oligopoly - based on the assumption that an increase in a firm's price will not be followed by competitors, but a decrease in price will. |
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Cournot Model |
Considers an oligopoly with only 2 firms competing (duopoly). - Both have identical and constant marginal costs of production - Each firm knows the quantity supplied by the other firm in the previous period and assumes that is what they will supply in the next period - Each firm has the same quantity, no longer any additional profit to be made |
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Nash Equilibrium |
The choices of all firms are such that there is no other choice that makes any firm better off |
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Prisoner's Dilemma |
(Nash Equilibrium) - Both should confess - b/c same outcome for both, but neither can improve his situation by confessing (if both stay silent, it's best for both, but then if one confesses, the other gets the worse sentence) |
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Dominant Firm Model |
Single firm has a significantly large market share because of its greater scale and lower cost structure |
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Price Discrimination |
Practice of charging different customers different prices for the same product or service. (eg. airline tickets). To work: - Downward sloping demand curve - At least 2 identifiable groups with different price elasticities of demand for the product - Prevent customers paying lower price from reselling to customers paying higher price |
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Rent Seeking |
Producers spend time and resources to try to acquire or establish a monopoly |
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Average Cost Pricing |
Most common form of regulation for monopolies. Forces monopolists to reduce price to where the firm's ATC intersects the market demand curve: - Increase output and decrease price - Increase social welfare - Ensure the monopolist a normal profit because price = ATC |
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Marginal Cost Pricing |
Also regulates monopolies. Forces monopolist to reduce price to the point where the firm's MC curve intersects the market demand curve. - Increases output and reduces prices - Causes monopolists to incur a loss (price is below ATC - Requires a government subsidy to work |
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Perfect Competition Pricing Strategy |
Producing quantity for which marginal cost equals marginal revenue (and also price) |
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Monopoly Pricing Strategy |
Marginal Revenue equals marginal cost (price is greater than both) |
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Monopolistic Competition Pricing Strategy |
Marginal Revenue equals Marginal Cost (price will be greater than both) |
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Oligopoly Pricing Strategy |
- Kinked Demand Curve - Marginal Revenue = Marginal Cost (but marginal revenue is discontinuous) - Collusion (must agree to share market) - Marginal cost = Marginal Revenue (and also price) - Dominant Firm Model - Dominant firm - marginal revenue = marginal cost, other firms - take price from Dominant firm as given - Game Theory - Price will be between the monopoly price ad the perfect competition price |
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N-Firm Concentration Ratio |
Sum or percentage of market shares of the largest N firms in a market (to judge market power) - Simple to calculate and understand - Does not directly measure market power or elasticity of demand - Insensitive to mergers - Barriers to entry not considered |
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Herfindahl-Hirschman Index |
The sum of the squares of the market shares of the largest firms in the market. Barriers to entry not considered. |
