imperfect competition and strategic behaviour

Question 1

industrial concentration

Answer 1

• an industry with a small number of relatively large firms is “highly concentrated”
• formal measure of industrial concentration is given by a concentration ratio: fraction of total market sales controlled by a specified number of the industry’s largest firms

Question 2

imperfect competition

Answer 2

• examples include monopolistic competition and oligopoly

- in between perfectly competitive and monopoly

Question 3

imperfect comp characteristics

Answer 3

• firms choose their products: firms sell an array of differentiated products that are similar enough to be called the same product, but dissimilar enough that all of them aren’t sold at the same price (ex. hairdresser)

Question 4

firm behaviour in imperfect comp

Answer 4

• firms spend large sums of money on advertising
• many firms engage a variety of non-price competition like competing standards of quality and product guarantees
• firms may engage in activities that appear to be designed to hinder the entry of new firms, preventing erosion of existing profits

Question 5

profit maximization in monopolistic competition

Answer 5

downward sloping demand curve; maximizes profit by producing Q when MC = MR

Question 6

profit maximization in oligopoly

Answer 6

must consider its rivals’ likely responses - they exhibit strategic behaviour - economists use “game theory” to predict what they’re gonna do

Question 7

prisoner’s dilemma

Answer 7

• example of potential conflict between the narrow self-interest of individuals and the broader interest of larger communities
• dominant strategy: yields a higher payoff no matter what the other players in a game choose
• dominated strategy: any other strategy available to a player who has a dominant strategy
• each player has a dominant strategy
• the dilemma is payoffs are smaller than they would be if each player had played a dominated strategy

Question 8

nash equilibrium

Answer 8

any combination of strategies in which each player’s strategy is his best choice, given the other player’s decision/strategy

Question 9

game theory applied to oligopoly

Answer 9

• the players are firms
• their game is played in the market
• their strategies are their price or output decisions
• the payoffs are their profits