CH11 - Imperfect Competition and Strategic Behaviour

Question 1

When are market structures considered imperfectly competitive?

Answer 1

When market structures aren’t monopolies nor perfectly competitive (2 extremes)

Question 2

Waht are the two common types of industres

Answer 2

many small firms OR few large terms

Question 3

What is the theory of monopolistic competition?

Answer 3

describes economic behaviour + outcomes in industries in which there are many small firms, but where each firm has some degree of market power

Question 4

What is an oligopoly?

Answer 4

industries in which there are a small number of large firms, each with considerable market power, and that compete actively with eachother
= highly concentrated

Question 5

What is a concentration rate?

Answer 5

Fraction of total market sales controlled by a specified nbr of industry’s largest firms. It measures the concentration of power - it can be big in absolute sense, but concentration rations suggests limited market per

Question 6

Give the 3 characteristics of imperfect competition:

Answer 6

1. Firms differentiate products bc assumed group of products are similar enough to be called same product
2. Firms are price-setters
3. Firms engage in non-price competition -> advertising, product features, entry barriers

Question 7

What is monopolistic competition?

Answer 7

market structure of an industry in which there are many firms and freedom of entry/exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price

Question 8

What is a natural consequence of product differentiation?

Answer 8

Product differentiation leads to establishment of brand names + advertising

Question 9

How are firms market powers when in monopolistic competition?

Answer 9

Generally, market powers are restricted
Short run: presence of similar products sold by compet firms, very elastic demand curve
Long run: free entry into industry, new firms can compete to take away profits

Question 10

Name 4 core assumptions of monopolistic competition

Answer 10

1. Each firm produces own version of differentiate product
2. All firms have same techno = same cost curves
3. Enough nbr of firms to ignore competition, no strategic behaviour
4. Freedom of entry/exit

Question 11

How is monopolistic competition in the short run?

Answer 11

• similar to a monopoly
• Negatively sloped demand curve, max profits by choosing lvl of output such that MC = MR
  -Profits can be zero, negative, positive

Question 12

How is monopolistic competition in the long run?

Answer 12

• 0 profits, excess capacity
• Very elastic demand curve, reflects that there are many close substitutes

Question 13

How are a firm’s demand curve and LRAC related when there is an entry of a new firm?

Answer 13

• Individual demand curves shift to the left.
• Entry continues until profits are eliminated.
• Each firm’s demand curve has shifted to the left until the curve is tangent to the long-run average cost (LRAC) curve.
• Each firm is still maximizing its profit, but its profit is now equal to zero.

Question 14

What is the excess-capacity theorem?

Answer 14

proposition that equilibrium in a monopolistically competitive industry will occur where each firm has excess capacity. Unit costs are therefore not minimized

Question 15

What happens if the DC for each firms cuts its LRAC curve? (= above it for some range of output)

Answer 15

• Range of output over which positive profits could be earned.
• Such profits would lead firms to enter the industry
• Entry shift the demand curve for each existing firm to the left until it is just tangent to the LRAC urve, where each firm earns zero profit.

Question 16

What happens if the DC for each firm lies below and never toughes the LRAC curve?

Answer 16

• No output at which costs could be covered, and firms would leave the industry.
• With fewer firms to share demand, the demand curve for each remaining firm shifts to the right.
• Exit will continue until demand curve for each remaining firm touches + is tangent to LRAC

Question 17

What is a cooperative/collusive outcome?

Answer 17

situation in which existing firms cooperate to maximise their joint profits

Question 18

What is a non-cooperative outcome?

Answer 18

industry outcome reached when firms maximise their own profit without cooperating with other firms.

Question 19

What is nash equilibrium?

Answer 19

In a Nash equilibrium, each player is assumed to know the equilibrium strategies of the other players, and no one has anything to gain by changing only one’s own strategy.

Question 20

What is the difference between covert collusion and tacit collusion?

Answer 20

Explicit agreement: overt or covert collusion, depending on whether the agreement is open or secret.

No explicit agreement: tacit collusion. In this case, all firms behave cooperatively without an explicit agreement to do so. They merely understand that it is in their mutual interest to restrict output and to raise prices.

Question 21

Define tacit collusion

Answer 21

When firms may behave cooperatively without any explicit agreement to do so, simply because each firm recognizes that maximizing their joint profits is in its own interest.
difficult to prove existence of it

Question 22

What are the 3 major types of competitive behaviour?

Answer 22

1. Reduce prices when differentiated products to attract customers
2. Non-price competition (ads)
3. Creative destruction (comp through innovation)

Question 23

How do monopolies usually compete with each other?

Answer 23

pricing
advertising
product quality
innovation

Question 24

What are the 4 types of firm-created entry barriers?

Answer 24

1. Brand proliferation (increase nbr differentiated products)
2. Advertising
3. Predatory pricing (keep them low, illegal)
4. Purchasing rival firms