FINAL PREP Chapter 11 Flashcards
What is imperfect competition?
the market in between monopoly and perfectly competative; more realistic; and have differing levels of market power
what are the two most common types of industries in an imperfect competition
how much market power do they typically have?
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)
What is a concentration Ratio?
What is the issue with concentration ratio?
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
3 central charateristics of IMperfect competition
- 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
What are price setters
what does its line look like
firms that set their own price (lol)
Downward negative slope for demand
What it monopolistic competition?
Edward Chamberlain
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
What is product differentiation?
- 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
what is the RESTRICTIONS for a firm in a MONOPOLISTIC COMPETITION in both the LONG and SHORT RUN
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
*4 assumptions of Monopolistic competition
1.each firm uses product differentiation , each demand curve is negatively sloped and highly elastic bc of substitutes
- 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
WHAT IS THE ONLY THING THAT DIFFERENTIATES PERFECT COMPETITION AND MONOPOLISTIC COMPETITION
PRODUCT DIFFERENTIATION
MONO COMP SHORT RUN PROFIT MAX FORMULA?
WHAT CAN PROFITS BE?!?
MR = MC
0, Positive, negative, just like monopoly
MONO COMP LONG-RUN PROFIT MAX FORMULA?
WHAT CAN PROFITS BE?!?
what is long run demand curve lookin like?
mr=mc
Zero profits and excess capacity
demand curve shifts to left until curve is tangent to long run average cost
long run entry will continue until what?
industry profits are eliminated
Excess capacity theorum?
idea that equilibrium in MONOCOMP industry will occur where EACH firm has EXCESS CAPACITY. unit costs are not minimized
In long-run equilibrium in monopolistic competition, goods are produced at a point where ____ ____ _____s are not at their minimum.
average total costs
What is an Oligopoly
industry that contains 2 or more firms that have significant industry output (high concentration ratio)
Why is PROFIT MAXIMIZATION more difficult for an olio
because MR depends on what rival firms do (MR=MC)
What is strategic behaviour?,
behaviour that takes accounts of the reactions of ones rivals in ones own behaviour
Basic Dilemma of OLIGO
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.
What is GAME THEORY?
Study of decision making in situations where one player anticipates the ractions of the other players to its own actions (PREDICTIVE GAMING)
How is game theory applied to an oligo
players are firms, map is the market, strategies are prices/outputs, winners are profits
Pro and Con of COOP in OLIGO
pro: can maximize joint profits
Con: firms have incentives to cheat
in a payoff matrix, when does coop go wrong?
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
What is a Nash Equilibrium
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
what are the 3 types of collusion in oligo?
Covert: secret partnership
overt: open partnership
tacit: no mention/unintentional partnership
What is Explicit Collusion?
making an explicit agreement between firms to cooperate and maintain joint-profit-maximization output (mostly illegal expect when govs do it)
What is Tacit Collusion
cant prove collusion but its happening, kinda coincidence
What is Competative Behaviour in OLIGO
typical price wars between rivals: car dealerships
consumers usually benefit the most from this (low prices, etc)
what is the Importance of Entry barriers in OLIGO
What are the 4 types of entry barriers in OLIGO?
High long run profits can drive in new firms that can steal/compete profits from existing ones
- Brand Proliferation:
more product differentiation = smaller market share available to new firm - Advertising:
cost disadvantages to rivals - Predatory Pricing:
- Purchasing Rival Firms:
