Exam 5 (13, 14, 15, 16, 17) Flashcards
Why do consumers dislike monopolies?
because they have to pay a higher price
Monopoly profit comes at the expense of …
Consumers: CS is lower and DWL is created
What does the gov do to avoid DWL?
put in policy attempting to prevent or eliminate monopolies (antitrust policy)
Oligopoly (def)
a market that is dominated by a small number of firms
Oligopoly Behavior (2 options)
- Compete against each other (by picking different quantity supplied and/or price charged)
- Cooperate to raise each others profits (known as collusion which is illegal in the US)
How do you measure an oligopoly?
using the Herfindahl-Hirschman Index (HHI)
HHI < 1000
strongly competitive market
HHI 1000 - 1800
somewhat competitive market
HHI > 1800
oligopoly
Monopolistic competition characteristics
- Many firms **
- Differentiated Product
- Free entry and exit in the long run **
* * = same as perfect competition
Ex of monopolistic competition
restaurants
How do monopolistically competitive firms gain market power?
product differentiation
3 Forms of Product Differentiation
- Differentiation by style or type
- Chinese food vs pizza
- sedans vs SUVs - Differentiation by location
- dry cleaner near home vs cheaper dry cleaner far away - Differentiation by Quality
- ordinary chocolate vs gourmet chocolate
Monopolistic competition demand curve is
downward sloping
Short-run maximization of profit (monopolistic competition)
- Produce the Q at which MR = MC
- Set price according to D curve
* Profit is the area between price and ATC (where quantity hits the demand curve and the ATC curve)
* Pos. profit attracts new entrants (so it won’t last)
Long run positive profit (monopolistic competition)
Positive profit = new firms enter the market; new entrants means fewer customers for the original firms: Demand and MR shift left
So, in the long run profit = 0
Long run equilibrium (monopolistic competition)
new entry stops
Long run negative profit (monopolistic competition)
loss = some firms exit industry; exit of firms means more customers for the remaining firms: Demand and MR shift right
Anytime the ATC is above the demand curve …
the firm is making losses so firms will exit industry
Anytime the ATC is tangent to D curve …
you know that the market is already in equilibrium
For perfect competition, break-even point is at …
price = lowest point on ATC
Long run equilibrium (monopolistic competition)
don’t produce at minimum cost output; firms in a mon. comp. industry produce less than the output at which avg total cost is minimized
External cost/benefit (def)
uncompensated cost/benefit imposed by an individual or firm on others
Externality (def)
an action that imposes an external cost or external benefit on others
