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ECC1000 > Chapter 10 & 13: Monopoly, Oliogopoly and strategic behaviour > Flashcards

Chapter 10 & 13: Monopoly, Oliogopoly and strategic behaviour Flashcards

1
Q

When does a monopoly exist?

A

When a single seller supplies the entire market for a particular good or service

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2
Q

What are the two conditions that enable a single seller to become a monopolist?

A

Unique good or service (no substitutes)

A way to prevent potential competitors from entering the market (high barriers to entry)

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3
Q

What is monopoly power?

A

A measure of a monopolist’s ability to set the price of a good or service

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4
Q

What are the types of barriers to entry?

A

Natural and Government-created barriers

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5
Q

What are the types of Natural barriers? Explain what they are

A

Control of resources:
- Competitors cannot find enough of a scarce resource to compete
Problems in raising capital:
- Unlikely that a lender will give you enough money to create a company capable of competing effectively with a well-established company (low chance of succeeding)
Economies of Scale:
- Economies of Scale occur when long-run average costs fall as production expands
- Low unit costs and the low prices that follow give some larger firms the ability to drive rivals out of business
- Firms in an industry that enjoy large economies of scale tend to combine to create a natural monopoly (single large firm has lower costs than any potential smaller competitor)

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6
Q

What are the types of Government barriers? Explain what they are

A

Licensing
- Governments occasionally establish monopolies through licensing to minimise negative externalities (through economies of scale)
- Opportunities to enter the business are limited
- Creates an opportunity for corruption
Patents and Copyright Laws
- Patents and copyrights create stronger incentives to develop new drugs and produce new music than would exist if market competitors could immediately copy inventions
- People and companies who hold patents or copyright have the right to decide how to distribute their drug/music and at what price

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7
Q

What makes a company/person a price-maker or price-taker?

A

Price-Maker: Having some control over what they charge
- Demand is down-ward sloping but relative to market (many price-output combinations)
- This is because the individual firm’s demand curve is the same as the market demand curve
Price-Taker: Having no control over what they charge
- Demand is perfectly elastic

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8
Q

What is the profit-maximising rule for the monopolist?

A

Marginal Revenue = Marginal Cost

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9
Q

What are the two separate effects that determine marginal revenue?

A
  • Price Effect: How the lower price effects revenue?

- Output Effect: How the lower price affects the number of customers?

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10
Q

How can we determine a monopolist’s profit and price set?

A

NEED TO INSERT THE IMAGE

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11
Q

When does a market failure (deadweight loss) occur?

A
  • When there is an inefficient allocation of resources in a market.
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12
Q

What are the problems with a monopoly?

A

Deadweight Loss
Inefficient Output and Price
- Smaller output and higher price than competitive industry
- Consumer surplus transferred to producer
Few Choices for Consumers
- Monopolists sell goods with few close substitutes
- Can leverage its market power to offer product features that benefit the monopoly at the expense of consumer choice.
Rent Seeking
- Lobbying leads to society becoming adversely affected because the gains from trade are smaller (price will rise)

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13
Q

What are the solutions to the problems of monopoly?

A

Breaking up a monopoly
- Introduce Antitrust litigation
- Designed to prevent monopoly practices and promote competition (re-introduce competitive market
Reducing Trade Barriers
- Creates more competitions
- Lessens the influence of the monopoly
- Promotes the efficient use of resources
Regulating Markets
Not practical to harness the benefits of competition in natural monopolies (economies of scale)
Governments can regulate

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14
Q

When does an oligopoly exist?

A

When a small number of firms sell a differentiated product in a market with high barriers of entry

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15
Q

What is a concentration ratio?

A

A measure of the oligopoly power present in an industry

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16
Q

What is the four-firm concentration ratio?

A

Expresses the sale of the four largest firms in an industry as a percentage of that industry’s total sales

17
Q

What is collusion?

A

Collusion is an agreement among rival firms that specifies the price each firm charges and the quantity it produces

18
Q

What is a cartel?

A

A cartel is a group of two or more firms that act in unison

19
Q

What attempts to prevent oligopolies from behaving like monopolies?

A

Anti-trust laws

20
Q

What is a firm’s market share determined by?

A
  • The product it offers
  • The price it charges
  • The actions of its rivals
21
Q

What is mutual interdependence?

A
  • A market situation where the actions of one firm have an impact on the price and output of its competitors.
22
Q

What happens to the output and price in an oligopoly (in relation to other market structures)?

A
  • Higher output (compared to monopoly), lower output (compared to competitive market)
  • Lower price (compared to monopoly), higher price (compared to competitive market)
23
Q

When does a Nash Equilibrium occur?

A
  • When all economic decision-makers opt to keep the status quo
  • The point of output both firms reach where neither has an incentive to change its short-term profit-maximising strategy.
24
Q

What effect does adding more firms have?

A
  • Complicates efforts to maintain a cartel

- Increases the possibility of a more competitive result

25
Q

What is the price effect?

A

How a change in price affects the firm’s revenue

26
Q

What is an output effect?

A

When a change in price affects the number of customers in a market

27
Q

When does predatory pricing occur?

A
  • When firms deliberately set their price below average variable costs with the intent of driving rivals out of the market
  • Firm suffers a short-run loss
  • Once rivals are gone, firm increases price (acts like a monopoly)
28
Q

What are network externalities?

A
  • When the number of customers who purchase or use a good influences the quantity demanded
  • Oligopolists can leverage the number of customers in their network and try making switching to another network more difficult
  • Causes small firms to be driven out of business or merge with larger competitors
29
Q

What is game theory?

A

A branch of mathematics that economists use to analyse the strategic behaviour of decision-makers

30
Q

What does a ‘game’ consist of?

A
  • A set of players
  • A set of strategies available to those players
  • A specification of the payoffs for each combination of strategies
31
Q

What is the ‘game’ usually represented by?

A
  • A pay off matrix which shows the players, strategies and pay-offs
32
Q

What is a dominant strategy?

A
  • When a player will always prefers one strategy, regardless of what his opponent chooses. (i.e strategy which yields most revenue/profit for each firm)
33
Q

When does a Nash equilibrium occur?

A

A Nash Equilibrium occurs when both firms use the dominant strategy

34
Q

When does a prisoner’s dilemma occur?

A

When decision makers face incentives that make it difficult to achieve mutually beneficial outcomes
It is primarily for one off decisions

35
Q

What is tit-for-tat?

A
  • A long-run strategy that promotes cooperation among participants by mimicking the opponent’s most recent decision with repayment in kind
36
Q

What is a sequential game?

A

One player moves first, the other player responds to the first move

37
Q

What is backward induction?

A

The process of deducing backward from the end of a scenario to infer a sequence of optimal actions

38
Q

What is the limitation of game theory?

A
  • Some games do not have a dominant strategy
  • Any of the four outcomes in a pay-off matrix is equally likely
  • There is no way to predict the next point

ECC1000 (11 decks)

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