6b. Cartels and Monopolistic Competition Flashcards
What is a “cartel”?
A cartel, a group of firms that collude, is a special case of oligopoly (few firms) in which the firms behave like a monopoly.
Why do cartels form?
To make more profits!
-> in a comp market, they sell at price pc and quantity qc
-> they can however agree as a cartel to each produce Qm and sell at Pm (where MC = MC)
Why do cartels fail?
If anyone acts upon their self interest, they would produce more, make a greater revenue = but if everyone does this… cartel fails
(Because firms can make even more money by cheating on the cartel agreement, collusion is not always successful.)
Are there any laws against cartels?
Sherman Antitrust Act (1890) and Federal Trade Commission Act (1914)
- Prohibit firms from explicitly agreeing to take actions that reduce competition.
- Jointly setting price strictly prohibited.
What is “monopolistic competition”?
Monopolistic competition is a market structure in which firms have market power but no additional firm can enter and earn a positive profit.
In monopolistic competition there are _______
In monopolistic competition there are NO barriers to entry
What is the difference between competition and monopolistic competition?
- Monopolistic Competition a downward-sloping residual demand curve and can charge a price > MC.
- This occurs because they have relatively few rivals or sell differentiated products.
What is the equilibrium in the long run for monopolistic competition?
MR=MC and p(Q)=AC(Q).
If profits are positive in a monopolistic competition, do new firms enter the market?
YES
Why does MR = MC lead to zero profits for monopolistic competition?
because there are no barriers to entry in the long run,
so eventually profit will be ZERO
What are the 2 conditions in a long-run monopolistically competitive equilibrium?
- Marginal revenue equals marginal cost
- because firms set output to maximize profit - Price equals average cost
- because firms enter until no further profitable entry is possible.
What is the name of the quantity at which AC reaches its minimum?
The smallest quantity at which AC reaches its minimum is called full capacity or minimum efficient scale.
Does the monopolistically competitive firm operate at less than full capacity in the LR?
Correct, LESS than full capacity
Remember,
where AC is minimum, that is full capacity
What could cause monopolistic competition?
HIGH fixed costs
The fewer monopolistically competitive firms, the less elastic is the residual demand curve each firm faces.
In the case of this firm in the DIG, what is the profit it generates? (its monopolistic competition)
q where MR = MC
drag up to demand curve for price
but that point is also where AC = p
so -> ZERO profit
