CHAPTER 11: IMPERFECT COMPETITION

Question 1

monopolist

Answer 1

sole supplier and has all market power

Question 2

perfect competition

Answer 2

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)

Question 3

‘matching’ markets

Answer 3

markets where transactions take place without money

involves matching heterogeneous suppliers with heterogenous buyers

Question 4

imperfect competition

Answer 4

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

Question 5

Imperfectly competitive firms

Answer 5

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

Question 6

oligopolistic competition

Answer 6

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

Question 7

Monopolistic competition

Answer 7

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

Question 8

duopoly

Answer 8

Duopoly defines a market or sector with just two firms

Question 9

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

Answer 9

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

Question 10

what is a critical determination in market structure

Answer 10

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

Question 11

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

Answer 11

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)

Question 12

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)

Answer 12

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)

Question 13

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)

Answer 13

an give rise to oligopoly

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

Question 14

what is market power

Answer 14

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

Question 15

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

Answer 15

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

Question 16

N-firm concentration ratio

N = the amount of firms

Answer 16

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

Question 17

differentiated product

Answer 17

one that differs slightly from other products

all in the same market

Question 18

why are demand curves not horizontal in a monopolist competition

Answer 18

different firms’ products are only limited substitutes

most will still stay with original firm they were with

Question 19

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

Answer 19

Firms are small and, with many competitors

individual firms do not compete strategically with particular rivals

Question 20

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

Answer 20

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

Question 21

what happens to a shift in industry demand of monopolistic competition

Answer 21

also shifts the demand facing each firm

Question 22

what attracts new firm to enter a monopolistic completion

Answer 22

free entry and the profits made by already established firms

Question 23

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

Answer 23

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

Question 24

what much each firm consider in an oligopolistic competition

Answer 24

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?

Question 25

collusion

Answer 25

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)

Question 26

what makes collusion more difficult

Answer 26

if there are many firms in the industry if the product is not standardized if demand and cost conditions are changing rapidly

Question 27

conjecture

Answer 27

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

Question 28

what is a game in oligopoly

Answer 28

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

Question 29

what is a strategy

Answer 29

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

Question 30

what is the Nash equilibrium

Answer 30

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

Question 31

dominant strategy

Answer 31

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

Question 32

payoff matrix

Answer 32

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

Question 33

prisoners dilemma game

Answer 33

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

Question 34

Cournot duopoly model

Answer 34

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

Question 35

reaction functions in cornet duopoly model

Answer 35

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

Question 36

what is the residual demand of a firm

Answer 36

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

Question 37

what is the reaction function of a firm

Answer 37

it is their optimal output in response to any output choice of another competitive firm reaction function of this competitive firm is similar

Question 38

what leads to markets with only a few players

Answer 38

nature of modern product development Product development (fixed) costs relatively small marginal cost of production,

Question 39

unintended barrier to entries in a market

Answer 39

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

Question 40

intended entry barriers

Answer 40

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

Question 41

netwrok externalities

Answer 41

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

Question 42

transition costs

Answer 42

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

Question 43

over-investment strategy

Answer 43

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

Question 44

a credible treaty

Answer 44

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

Question 45

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

Answer 45

competitive boyyy

Question 46

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

Answer 46

non competitive

Question 47

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

Answer 47

ye boyyyy

Question 48

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

Answer 48

perfect competition

Question 49

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

Answer 49

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)

Question 50

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

Answer 50

both end up worse confessing more beneficial if they remain silent

Question 51

when does the equilibrium occur in the reaction function

Answer 51

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

Question 52

who usually have UNINTENDED barriers to entry

Answer 52

Oligopolists so the small amount of suppliers in a oligopolist market

Question 53

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

Answer 53

cause sometimes, it be too costly

Question 54

how does a size of market evolve in the long run

Answer 54

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)

Question 55

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

Answer 55

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