Market Structures Flashcards
What are the features of perfect competition?
Many number of firms
Easy entry (low barriers)
Product is identical/homogeneous eg: wheat
Demand curve is horizontal, perfectly elastic
Firm is a price taker
Profit maximizing output MR=MC
Can enjoy allocative and productive efficiency
Short run: profit
Long run: Break even
What are the features of monopolistic competition?
Many number of firms
Easy entry (low barriers)
Product is differentiated eg: restaurants
Demand curve is downward sloping, relatively elastic
Price makers/setters
Profit maximizing output MR=MC
Cannot enjoy allocative and productive efficiency
What are the features of a Monopoly?
One firm
Restricted entry (high barriers)
Product is unique, no close substitute eg: utilities
Demand curve is downward sloping inelastic
Price makers/setters
Cannot enjoy allocative or productive efficiency
Short run/long run can enjoy supernormal profits
Why are there high barriers to entry in a monopoly?
Government gives one firm exclusive rights
Power and ownership of a key resource
Network externalities
High economies of scale
What are the features of an Oligopoly?
Small number of large sellers (high concentration ratio)
High barriers to entry: loyalty, economies of scale, sunken costs
Product is identical, similar with somewhat differentiation
Demand curve is kinked
Price makers but price setting is limited so they compete with non price factors (branding, customer loyalty, marketing)
There is interdependency as rival prices/output affects others
Possibility of: Collusion (illegal), Cartels (legal)
Not allocatively or productively efficient
What is game theory?
It is the study of how people behave in strategic situations
What is Nash equilibrium?
A situation where each firm chooses the best strategy given the strategies chosen by others
What is dominant strategy?
A strategy that is best for the firm no matter what others use
What is a payoff matrix?
A table that shows the payoffs that each firm earns from every combination of strategies by the firm
What is prisoners dilemma?
A game in which pursuing dominant strategies results in non cooperation that leaves everyone worse off
