Chapter 15: Monopolistic Competition and Oligopoly Flashcards
Monopolistic Competition
market with many firms that sell goods and services that are similar, but slightly different
characteristics of monopolistic competition
Many firms, Price maker, MR<Price, about the variety of products
-have substitutes that are close but not perfect
-while perfect competition consumers are indifferent between products of competitors
-while monopoly a product has no close substitutes
product differentiation
the creation of products that are similar to competitors’ products but more attractive in some ways
profit maximization
MR=MC on the demand curve
monopolistically competitive market in the long run
other firms can enter the market
reasons for excess capacity
1.) Price exceeds marginal cost in the long run
2.) firms do not produce the lowest ATC level of output
3.) average costs may be higher due to advertising
the costs of a monopolistic competition
it is inefficient, firms maximize the price at a cost that is higher than MC, results in deadweight loss
Explain how product differentiation motivates advertising and branding
differentiation enables firms to keep making profits in the short run. Ads can inform or convince customers of the differences between products
oligopoly
market with few firms which sell a similar good or service
characteristics of an oligopoly
-price makers
- some barriers to entry
- about the number of firms
why does an oligopoly exist
collaboration
Describe the strategic production decision of firms in an oligopoly
quantity and price effects
when quantity effect>price effect output is increased
when price effect>quantity effect, no incentive to increase output
collusion
the act of working together to make decisions about price and quantity
major advantages of collusion for oligopolistic producers
higher profits for less output
dominant strategy
a strategy that is the best one for a player to follow no matter what strategy other players choose
