Chapter 15: Monopolistic competition, oligopoly and contestable markets

Question 1

Define monopolistic competition

Answer 1

A market that shares some characteristics of a monopoly and some of perfect competition

Question 2

Define product differentiation

Answer 2

A strategy firms adopt that marks their product as being different from their competitors

Question 3

Define oligopoly

Answer 3

A market with a few dominant sellers in which each firm must take account of the behaviour and likely behaviour of rival firms in the industry

Question 4

Define non-price competition

Answer 4

A strategy whereby firms compete by advertising to encourage brand loyalty, or by quality or design, rather than on price

Question 5

Define cartel

Answer 5

An agreement between firms on price and/or output with the intention of maximising their joint profits

Question 6

Define tacit collusion

Answer 6

Situation occurring when firms refrain from competing on price, but without communication or formal agreement between them

Question 7

Define n-firm concentration ratio

Answer 7

A measure of the market share of the largest n-firms in an industry

Question 8

Define predatory pricing

Answer 8

An anticompetitive strategy in which a firm sets price below average variable costs in an attempt to force a rival firm out of the market and achieve market dominance

Question 9

Define contestable market

Answer 9

A market in which the existing firm makes only normal profit, as it cannot set a price higher than average cost without attracting entry, owing to the absence of barriers to entry and sunk costs

Question 10

Define hit-and-run entry

Answer 10

Where a firm enters a market to take short-run supernormal profits knowing it can exit without incurring costs