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Micro Economics > CHAPTER 11: IMPERFECT COMPETITION > Flashcards

CHAPTER 11: IMPERFECT COMPETITION Flashcards

1
Q

monopolist

A

sole supplier and has all market power

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2
Q

perfect competition

A

a lot of suppliers but no one has real market power

accepts the price for his product that is determined in the market by the forces of supply and demand

perfect competitor faces a perfectly elastic demand at the existing market price (only market structure to have this characteristic)

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3
Q

‘matching’ markets

A

markets where transactions take place without money

involves matching heterogeneous suppliers with heterogenous buyers

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4
Q

imperfect competition

A

there where the real world lies, in between if the extremes

there could be many large firms and many small organizations offering same products and services

there could be some different companies offering a solution to same problem or need, but by giving different products and services

we can differentiate imperfect competition from perfect competition by the characteristics of the demand curves they all face

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5
Q

Imperfectly competitive firms

A

face a downward-sloping demand curve, and their output price reflects the quantity sold

they have some influence on the price of the good

also that if they change the price they charge, they can expect demand to reflect this in a predictable manner

demand curve for the firm and industry coincide for the monopolist, but not for other imperfectly competitive firms

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6
Q

oligopolistic competition

A

market with a small number of suppliers

The home appliance industry is an oligopoly.

The prices of KitchenAid appliances depend not only on its own output and sales, but also on the prices of Whirlpool, Maytag and Bosch

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7
Q

Monopolistic competition

A

market with many sellers of products that have similar characteristics who may differentiated products

Monopolistically competitive firms can exert only a small influence on the whole market

the local Italian restaurant is a monopolistic competitor. Its output is a package of distinctive menu choices, personal service, and convenience for local customers. It can charge a different price than the out-of-neighbourhood restaurant

also face downward sloping demand

free entry and exit. There are no barriers to entry

normal profits are with long run equilibrium

Economic profits will be competed away by entry, just as losses will erode due to exit

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8
Q

duopoly

A

Duopoly defines a market or sector with just two firms

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9
Q

can a sole domestic producer act the same way as defined earlier as a monopoly if he has international competition

A

nah boy

could be described as being part of an international oligopoly if there are small amount of international suppliers, such as bombardier and others

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10
Q

what is a critical determination in market structure

A

Size of the market (amount of demand) relative to cost structure of the industry)

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11
Q

what happens if q1 is small compared to long run Demand

basically, what happens when the minimum average cost output on LATC1 is there where q1 (smallest output per firm) is situated

A

it means that N1 (amount of suppliers) is large

firms only need to produce a bit of output (q1) to satisfy whole market Q (whole output)

outcome might be perfect competition
(N virtually infinite)

monopolistic competition
(N large with slightly differentiated products produced by each firm)

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12
Q

what happens when the minimum average cost output corresponds the the biggest LATC curve (LATC 2)

basically the curve that corresponds to the biggest output (q2)

(scale economies are needed cause this curve huge and it means expensive costs)

A

could be a monopoly with only one supplier

since economies of scale are needed, not enough resources can be exploited by all

its output (q2) is literally the whole market’s output (Q)

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13
Q

what happens when the minimum average cost output is there with LATC3

basically, what happens if the output (q3) needed is large, almost half of the whole market output (Q)

A

an give rise to oligopoly

with each firm producing more than q1 but less than a monopolies

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14
Q

what is market power

A

the influence that a firm or organization has on its market

the most important element in defining market structure

percentage of sales in the market thatis attributable to a small number of firms

Such a statistic is called a concentration ratio

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15
Q

in the Real world, can we define an industry as specific type of market structure such as perfect competition, duology or monopoly

A

nah boi

Canada’s brewing sector has two large brewers in Molson-Coors and Labatt, a couple of intermediate sized firms such as Sleeman, and an uncountable number of small boutique brew pubs

a large number of brewers satisfy one requirement for perfect competition, it would not be true to say that the biggest brewers wield no market power; and this is the most critical element in defining market structure

we could not define this market as a duopoly since there are countless others who, together, are important

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16
Q

N-firm concentration ratio

N = the amount of firms

A

sales share of the largest N firms in that sector of the economy

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17
Q

differentiated product

A

one that differs slightly from other products

all in the same market

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18
Q

why are demand curves not horizontal in a monopolist competition

A

different firms’ products are only limited substitutes

most will still stay with original firm they were with

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19
Q

why are there limits to economies of scale in a monopolistic competition

A

Firms are small and, with many competitors

individual firms do not compete strategically with particular rivals

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20
Q

what does the market share of each firm depend on in a monopolistic competition

A

on the price that it charges and on the number of competing firms

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21
Q

what happens to a shift in industry demand of monopolistic competition

A

also shifts the demand facing each firm

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22
Q

what attracts new firm to enter a monopolistic completion

A

free entry and the profits made by already established firms

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23
Q

what are the two conditions that must hold at the long term equilibrium of a long term competition

monopolistically competitive equilibrium in the long run

A
  1. the optimal pricing rule must be satisfied—that is MC=MR
  2. only normal profits are made at the final equilibrium. These are competed away as a result of free entry

these two conditions must exist at the optimal output

requires the firm’s demand curve to be tangent to the ATC curve at the output where MR=MC

ATC must equal price at the output where MC=MR

implies that the ATC is tangent to the demand curve where P = ATC

24
Q

what much each firm consider in an oligopolistic competition

A

how its actions affect the decisions of its relatively few competitors

Each firm must guess how its rivals will react

are they gonna collude or compete?

25
Q

collusion

A

explicit or implicit agreement to avoid competition with a view to increasing profit

a cartel is a form a collusion

without it, each firm’s demand curve depends on how competitors react (conjecture)

26
Q

what makes collusion more difficult

A

if there are many firms in the industry

if the product is not standardized

if demand and cost conditions are changing rapidly

27
Q

conjecture

A

belief that one firm forms about the strategies of another competing firm

28
Q

what is a game in oligopoly

A

situation in which contestants plan strategically to maximize their profits, taking account of rivals’ behavior

this makes oligopolists act like poker players trying to anticipate what competitors are going to do

In most games, each player’s best strategy depends on the strategies chosen by their opponents

29
Q

what is a strategy

A

game plan describing how a player acts, or moves, in each possible situation

30
Q

what is the Nash equilibrium

A

commonly used concept of equilibrium

one in which each player chooses the best strategy, given the strategies chosen by the other player

there is no incentive for any player to move

no player wants to change strategy

there where each reaction function intersects

each firm is making an optimal decision, conditional upon the choice of its opponent

31
Q

dominant strategy

A

player’s best strategy, independent of the strategies adopted by rivals

32
Q

payoff matrix

A

defines the rewards to each player resulting from particular choices

when game is competitive, each player will tend to their preferences, sometimes not being choice overall in the payoff matrix

33
Q

prisoners dilemma game

A

can be constructed to reflect a scenario in which two prisoners, under isolated questioning, each confess to a crime

it can define wether companies choose to cooperate with other companies or simply not compete, or completely compete with them

demonstrates tension between competition and collusion

34
Q

Cournot duopoly model

A

duopoly model that we frequently use in economics to analyze competition between a small number of competitors

each firm reacting optimally in their choice of output to their competitors’ output decisions

35
Q

reaction functions in cornet duopoly model

A

define the optimal choice of output conditional upon a rival’s output choice

36
Q

what is the residual demand of a firm

A

residual demand is basically the difference between original demand and second demand

first, we must see what is that firms demand without competitors and see what is their output

to do this, we must do initial MC = MR

when competitors reach, we must consider their outputs

original output minus that of the competitors’ output gives second output

residual demand is each original quantity demanded minus quantity of output of competitors

this corresponds to original’s firms second output

37
Q

what is the reaction function of a firm

A

it is their optimal output in response to any output choice of another competitive firm

reaction function of this competitive firm is similar

38
Q

what leads to markets with only a few players

A

nature of modern product development

Product development (fixed) costs

relatively small marginal cost of production,

39
Q

unintended barrier to entries in a market

A

mostly common with oligopolists

they tend to have substantial fixed costs

they also tend to have declining average costs up to very high output levels

gives rise to a supply side with a small number of suppliers

an additional competitor in a market with gyu profits could result in a all of them getting losses

40
Q

intended entry barriers

A

patent law

advertising cause attempt to market their product as being distinctive and even enviable

predatory pricing illegal form of entry deterrence. lowering prices to impossible lows to deter new arrivants

Network externalities

Transition costs

over investment strategy

41
Q

netwrok externalities

A

arise when the existing number of buyers itself influences the total demand for a product

An individual contemplating joining a social network has an incentive to join one where she has many existing ‘friends’

ex: face has many more members than MySpace or Google+, hence its easier to attract other users

42
Q

transition costs

A

can be erected by firms who do not wish to lose their customer base

ex: cellphone and Contract-termination costs are one obstacle to moving to a new supplier

43
Q

over-investment strategy

A

existing supplier generates additional production capacity through investment in new plant or capital

its like a warning to potential new entrants

such a strategy may not always be feasible: It might be just too costly

44
Q

a credible treaty

A

one that is effective in deterring specific behaviours

a competitor must believe that the threat will be implemented if the competitor behaves in a certain way

45
Q

if many firms can produce at a cost efficient scale, is the market competitive or non competitive

A

competitive boyyy

46
Q

If one or only a few firms can produce at a cost-efficient scale, s the market competitive or non competitive

A

non competitive

47
Q

if you have a larger share in the market, do you have a bigger market power?

A

ye boyyyy

48
Q

which is the only market structure to face a perfectly elastic demand at the market price

A

perfect competition

49
Q

what happens to the demand of an industry when new firms join it

A

the presence of more firms in the industry reduces the demand facing each one

when more firms enter, it shifts the demand of each firm inwards

process will continue as long as there is stilll economic profit to be made

For entry to cease, average cost must equal price (AC = P)

50
Q

in the prisoners’ dilemma game, do they end up worse confessing or remaining silent

A

both end up worse confessing

more beneficial if they remain silent

51
Q

when does the equilibrium occur in the reaction function

A

equilibrium occurs when each reaction function intersects each other (RA = RB)

any other output from one firm will make the other firm change its output, so can’t be output

both functions are downward sloping: The more B produces, the smaller is the residual market for A, and therefore the less A will produce and vice versa

52
Q

who usually have UNINTENDED barriers to entry

A

Oligopolists

so the small amount of suppliers in a oligopolist market

53
Q

why is an over investment strategy as an intended barrier not always feasible

A

cause sometimes, it be too costly

54
Q

how does a size of market evolve in the long run

A

also evolves over the long run: Time is required for entry and exit

demand in the long run is downward sloping

initially, all suppliers produce output of q1 and total market output is Q1

The number of firms in the industry is N1 (=Q1/q1)

55
Q

what is the appropriate description of the mutual interdependence that characterizes oligopolistic industries?

A

The firms C and D are interdependent because their profits depend not just on their own price, but also on the other firm’s price

Micro Economics (13 decks)

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