FINAL PREP Chapter 11

Question 1

What is imperfect competition?

Answer 1

the market in between monopoly and perfectly competative; more realistic; and have differing levels of market power

Question 2

what are the two most common types of industries in an imperfect competition

how much market power do they typically have?

Answer 2

Industries with many small firms
ex: pubs, salons, gyms ,etc ( little market power)

Industries with few large firms
ex: hydro, groceries, airplines (greater market power)

Question 3

What is a concentration Ratio?

What is the issue with concentration ratio?

Answer 3

the fraction of total market sales controlled by a # of the INDUSTRY’S LARGEST FIRMS

ex: an industry with 1 giant firm and 29 small ones is more concentrated than 5 equal sized ones

It can only be defined within a smaller span of market which is limited in the modern eyes of globalization

Question 4

3 central charateristics of IMperfect competition

Answer 4

• firms differentiate products
  product customization for consumer desire
• firms set their prices
  set a price and let demand determine sales
  changes in market conditions are signaled b y change in sales
• firms engage in non-price competition
  Advertising
  Product features
  entry barriers

Question 5

What are price setters

what does its line look like

Answer 5

firms that set their own price (lol)
Downward negative slope for demand

Question 6

What it monopolistic competition?
Edward Chamberlain

Answer 6

industry with a lot of firms and freedom to enter/exit but each firm has a somewhat different product from the other giving them more control over its price.

ex: Fast food industry
mechanics, electricians, etc

Question 7

What is product differentiation?

Answer 7

• brand name, Advertising, and a degree of market power over firms own product

-Ability to raise price as seen fit

ex: better craftsmanship, cheaper prices ,better tasting food

Question 8

what is the RESTRICTIONS for a firm in a MONOPOLISTIC COMPETITION in both the LONG and SHORT RUN

Answer 8

SHORT RUN: very elastic negatively sloped demand curve bc of similar products being sold

LONG RUN:
risk of having profits competed away by exisitng firms in a free entry industry

Question 9

*4 assumptions of Monopolistic competition

Answer 9

1.each firm uses product differentiation , each demand curve is negatively sloped and highly elastic bc of substitutes

2. All firms have access to the same technology

3.industry contains so many firms that each ones ignore the possible reactions of its many competitors when they up their output or price; DONT BEHAVE STRATEGICALLY

4.FREEDOM OF ENTRY AND EXIT. new firms have an incentive to enter, when they do demand for industry goes up for all firms in industry

Question 10

WHAT IS THE ONLY THING THAT DIFFERENTIATES PERFECT COMPETITION AND MONOPOLISTIC COMPETITION

Answer 10

PRODUCT DIFFERENTIATION

Question 11

MONO COMP SHORT RUN PROFIT MAX FORMULA?

WHAT CAN PROFITS BE?!?

Answer 11

MR = MC

0, Positive, negative, just like monopoly

Question 12

MONO COMP LONG-RUN PROFIT MAX FORMULA?

WHAT CAN PROFITS BE?!?

what is long run demand curve lookin like?

Answer 12

mr=mc

Zero profits and excess capacity

demand curve shifts to left until curve is tangent to long run average cost

Question 13

long run entry will continue until what?

Answer 13

industry profits are eliminated

Question 14

Excess capacity theorum?

Answer 14

idea that equilibrium in MONOCOMP industry will occur where EACH firm has EXCESS CAPACITY. unit costs are not minimized

Question 15

In long-run equilibrium in monopolistic competition, goods are produced at a point where ____ ____ _____s are not at their minimum.

Answer 15

average total costs

Question 16

What is an Oligopoly

Answer 16

industry that contains 2 or more firms that have significant industry output (high concentration ratio)

Question 17

Why is PROFIT MAXIMIZATION more difficult for an olio

Answer 17

because MR depends on what rival firms do (MR=MC)

Question 18

What is strategic behaviour?,

Answer 18

behaviour that takes accounts of the reactions of ones rivals in ones own behaviour

Question 19

Basic Dilemma of OLIGO

Answer 19

Firms choose between cooperation/collusive outcome (maximizing joint profits) and competition/non-cooperative outcome (maximizing individual profits).

Decision to cooperate or compete depends on expectations of rivals’ responses.

Question 20

What is GAME THEORY?

Answer 20

Study of decision making in situations where one player anticipates the ractions of the other players to its own actions (PREDICTIVE GAMING)

Question 21

How is game theory applied to an oligo

Answer 21

players are firms, map is the market, strategies are prices/outputs, winners are profits

Question 22

Pro and Con of COOP in OLIGO

Answer 22

pro: can maximize joint profits

Con: firms have incentives to cheat

Question 23

in a payoff matrix, when does coop go wrong?

Answer 23

when the firms think ther other firm in gonna cheat and so they both produce 2/3 income instead of half, resulting in a loss for both firms

Question 24

What is a Nash Equilibrium

Answer 24

an equilibrium resulting from when EACH PLAYER DOING THE BEST they can in A PAYOFF MATRIX given current strategic behaviour

The best outcome is achieved when everybody is doing what is in their best interest, FOR THE TEAM

Question 25

what are the 3 types of collusion in oligo?

Answer 25

Covert: secret partnership

overt: open partnership

tacit: no mention/unintentional partnership

Question 26

What is Explicit Collusion?

Answer 26

making an explicit agreement between firms to cooperate and maintain joint-profit-maximization output (mostly illegal expect when govs do it)

Question 27

What is Tacit Collusion

Answer 27

cant prove collusion but its happening, kinda coincidence

Question 28

What is Competative Behaviour in OLIGO

Answer 28

typical price wars between rivals: car dealerships

consumers usually benefit the most from this (low prices, etc)

Question 29

what is the Importance of Entry barriers in OLIGO

What are the 4 types of entry barriers in OLIGO?

Answer 29

High long run profits can drive in new firms that can steal/compete profits from existing ones

1. Brand Proliferation:
   more product differentiation = smaller market share available to new firm
2. Advertising:
   cost disadvantages to rivals
3. Predatory Pricing:
4. Purchasing Rival Firms: