Market structure: monopolistic competition and oligopoly Flashcards
Define monopolistic competition.
a market that shares some characteristics of monopoly and some of perfect competition
Give four examples of markets with monopolistic competition.
- travel agents
- hairdressers
- fast food restaurants
- taxis
(basically anything with many firms with similar but not identical products)
What is product differentiation?
strategy adopted by firms that marks their product as different to that of their competitors
When there is monopolistic competition, will demand be price elastic or inelastic?
price elastic (but not perfectly), as products from different firms are substitutes but not exactly the same
When there is monopolistic competition, are there barriers to entry?
no
What are the three main features of monopolistic competition?
- product differentiation
- freedom of entry
- many firms
Is short run equilibrium under monopolistic competition the same as for a monopoly or perfect competition?
monopoly - with firms making supernormal profits
In the long run, what will happen to a firm’s demand curve under monopolistic competition?
It will shift left, as the supernormal profits attract more firms and take some of the demand.
Is productive efficiency achieved under monopolistic competition?
no, as firm will not operate at minimum point on long-run average cost curve
Is allocative efficiency achieved under monopolistic competition?
no, as price charged is above marginal cost
Is dynamic efficiency achieved under monopolistic competition?
maybe in short run if firms devote resources to improving products, but not in long run as firms will only make normal profits
Is X-efficiency achieved under monopolistic competition?
maybe if firms devote excessive resources to advertising or innovation but extent likely to be limited by competition
What does the n-firm concentration ratio measure?
market share of largest n firms in the industry
Does higher n-firm concentration ratio mean the market is closer to monopoly than perfect competition?
monopoly
In what two ways can the n-firm concentration ratio be measured?
- % of output
- % of employment
Define oligopoly.
a market with few sellers in which each forms must take account of behaviour and likely behaviour of other firms in the market
Give four examples of oligopolies in the UK.
- tobacco
- cars
- newspapers
- banks
What method can be used to model the strategic interaction betweeen firms in an oligopoly?
game theory
Give an example of game theory that can be applied to oligopolies.
prisoners’ dilemma
What are the three possible outcomes of the prisoners’ dilemma?
- both confess - both get long sentences
- neither confess - both get short sentences
- one confesses - he gets no sentence, other gets long sentence
In game theory, what is a dominant strategy?
situation where a player’s best strategy is independent of those chosen by others
How can the prisoners’ dilemma be applied to a duopoly?
Both will have dominant strategy of producing high output and low profits, whereas best outcome woud be low output and high profits.
Define the Nash equilibrium.
when each player’s chosen strategy maximises payoffs given other player’s choice, so no player has incentive to alter behaviour
Define a cartel.
agreement between forms on price and output with intention of maximising joint profits
Define overt collusion.
when firms openly work together to agree on prices or market shares
Is it legal to operate a cartel in the UK?
No, it is banned under the UK Competition Act
Give an example of overt collusion.
OPEC - Organisation of Petroleum Exporting Countries controls the price of oil
What is tacit collusion?
when firms refrain from competing on price but without communication or formal agreement
Define monopsony.
market with a single buyer
Define oligopsony.
market with a few buyers
