4.3 and 4.4 Monopolistic Competition and Oligopoly Flashcards
Monopolistic Competition
Competitive market structure with a downwar sloping demand curve and the ability for the firm to make supernomal profits in the short run.
Characteristics of Monopolistic competition
Many firms, differentiated products, few barriers to entry and exit, no dominant firm, downward sloping demand curve.
Type of profits firms in monopolistic competition market make in the SR.
Supernormal
What happens to the demand curve for an individual firm in the LR?
It becomes flatter and demand becomes more elastic. It also moves to the left.
In the long run, what type of profits are made in monopolistically competitive markets?
Normal
How do firms differentiate their products?
Non-price competition and advertising.
Are MC firms efficient?
No- they do not operate at lowest average costs or where P=MC.
What are the welfare benefits of MC?
Greater choice of products for consumers and an incentive for firms to innovate.
What are the welfare and efficiency losses with MC?
Lack of economies of scale as firms cannot grow in the market; advertising can be seen as wasteful; not productively or allocatively efficient in SR or LR.
Oligopoly
Market structure with a few dominant firms
Interdependence
Where firms base their decision making on the decisions of other firms in the market.
Non-price competition
Firms compete on other aspects than price such as product, location and branding.
Characteristics of oligopoly
Few dominant sellers, interdependence, barriers to entry, differentiated products, non-price competition.
Differentiated products
Where products are distinguished from competitors’ products by branding and advertising; after sales service; extra features; location or perfromance and reliability
Non-price competition
Firms choose not to compete on price but on advertising or branding.
Sticky prices
Scenario in which the price of the good is slow to change despite changes in the market that suggest a different price is optimal.
Collusion
Scenario where firms work together in secret to gain an unfair market advantage.
Overt collusion
Scenario where firms work together with a formal agreement.
Tacit collusion
Scenario where firms work together without a formal agreement often by observing other firms in the market.
Concentration ratio
Way of measuring the market dominance of the top few firms in the market by adding up each firm’s individual market share and looking at this as a percentage of the total market.
Calculation of the concentration ratio
(Total sales of the top ‘n’ number of firms/ Sales of the entire market)*100
Game Theory
Developed by economist John Nash, this theory considers the best outcome for firms in an oligpolistic market. It states all firms should make their decisions based on the likely actions of the other firms and no firm should make a decision in isolation.
