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33 Cards in this Set
- Front
- Back
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What is a monopolistic competition?
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A type of market structure that is kinda in the middle between a monopoly and a perfectly competitive market.
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What are the 3 characteristics of monopolistic competition?
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1. Many small sellers
2. a differentiated product 3. Easy market entry and exit |
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In monopolistic competition, when is the many-sellers condition met?
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It is met when each firm is so small relative to the total market that its pricing decisions have a negligible effect on the market price.
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What is Product Differentiation?
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The process of creating real or apparent differences between goods and service.
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TRUE OR FALSE: When a product is differentiated, buyers are indifferent as to which seller's product they buy.
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FALSE. Buyers are NOT indifferent as to which seller's product they buy.
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What is Nonprice Competition?
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The situation in which a firm competes using advertising, packaging, product development, better quality, and better service rather than have lower prices.
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Do monopolistically competitive markets face low or high barriers to entry?
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LOW barriers to entry
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What is the most common market structure in the US?
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Monopolistic competition
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What are some examples of Monopolistic Competition?
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Grocery stores, hair salons, gas stations, DVD rental stores, diet centers, and restaurants.
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Compared to the demand curve for a perfectly competitive firm, is the demand curve for a monopolistically competitive firm more (flatter) or less (steeper) elastic?
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LESS elastic so the demand curve is STEEPER than that of perfectly competitive
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Compared to the demand curve for a monopolist firm, is the demand curve for a monopolistically competitive firm more (flatter) or less (steeper) elastic?
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MORE elastic so demand curve is FLATTER than that of a monopolist firm.
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Like the monopolist, the monopolistically competitive firm maximizes short-run profit by doing what?
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By following the MR=MC rule!
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Causation Chain: If a new firms enter and the representative firm's demand curve decreases...finish the causation chain.
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New firms enter --> Firm's demand curve decreases --> Firm increases advertising expenses (to differentiated) --> Firm's LRAC curve increases --> Zero economic profit
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What is Oligopoly?
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A market structure that is imperfectly competitive in which a few large firms dominate the market.
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What are 3 characteristics of Oligopoly?
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1. Few large sellers
2. EITHER a homogeneous or a differentiated product 3. Difficult market entry |
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What is Mutual Interdependence?
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A condition in which an action by one firm may cause a reaction from other firms.
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Oligopoly is a consequence of what?
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Mutual Interdependence
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In Oligopoly, when is the few-sellers condition met?
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It is met when these few firms are so large relative to the total market that they can effect the market price.
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What are some examples of some things sold in oligopolies?
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Tires, detergents, breakfast cereals, metals, and cars.
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What is the most significant barrier to entry in an oligopoly? Example?
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Economies of scale! Example: Larger car makers get lower average total costs than those incurred by smaller car makers thus US auto industry has moved from 60 firms to 3 major US owned firms.
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What are 4 things that help determine price and output decisions for an oligopolist?
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1. Nonprice competition
2. Price leadership 3. The cartel 4. Game theory |
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What is Price Leadership?
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A pricing strategy in which a dominant firm sets the price for an industry and the other firms follow.
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What is a Cartel?
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A group of firms that formally agree to reduce competition by coordinating the price and output of a product.
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What is the goal of a cartel?
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To reap monopoly profits by replacing competition with cooperation.
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What is Game Theory?
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A model of the strategic moves and counter moves of rivals.
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What does the Payoff Matrix demonstrate?
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It demonstrates why a competitive oligopoly tends to result in both rivals using a low-price strategy that does not maximize profits.
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As long as the benefits exceed the costs, cheating can do what?
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Can threaten formal or informal agreements among oligopolists to maximize joint profits.
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What are 3 changes that occur if a perfectly competitive industry is suddenly turned into an oligopoly by selling a differentiated product?
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1. Price charged will be higher than under perfect competition
2. Oligopoly is likely to spend money on advertising, product differentiation, and other forms of nonprice competition. 3. In the long run, a perfectly competitive firm earns 0 economic profit while oligopoly can earn a higher profit cuz its more difficult for competitors to enter the industry. |
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Short-Run equilibrium for a monopolistic competitor can yield what?
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Economic losses, zero economic profits, or economic profits.
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In the Long-Run equilibrium, monopolistic competitors can yield what?
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ONLY zero economic profits.
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Comparing monopolistic competition with perfect competition, we find that in the long run the monopolistically competitive firm does what 4 things?
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1. fails to achieve allocative efficiency
2. charges a higher price 3. Restricts output 4. does not produce where average costs are at a minumum |
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Game theory reveals what 3 things?
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1. Oligopolies are mutually interdependent in their pricing
2. without collusion, oligopoly prices and mutual profits are lower 3. Oligopolists have a temptation to cheat on any collusive agreement. |
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Compairing oligopoly with perfect competition, the oligopolist does what 3 things?
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1. allocates resources inefficiently
2. Charges a higher price 3. Restricts output so that price may exceed average cost. |
