Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics for Business > Module 8 - Imperfect competition > Flashcards

Module 8 - Imperfect competition Flashcards

1
Q

Independence (of firms in a market)

A

When the decisions of one firm in a market will not have any significant effect on the demand curve of its rivals.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Product differentiation

A

When one firm’s product is sufficiently different from its rivals’, it can raise the price of the product without customers all switching to the rivals’ products. This gives a firm a downward-sloping demand curve.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Assumptions under monopolistic competition

A
  1. There are many firms in the market and each firm has a small enough market share to make firms independent of each other.
  2. There is freedom of entry into the industry.
  3. Each firm sells a differentiated product.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Explain how monopolistically competitive firms determine price and output in the short run

A

A firm in monopolistic competition will maximise profits by producing where MR = MC.
In the short run, a monopolistically competitive firm can make supernormal profits. The amount of profit depends on the position of the demand (AR) curve relative to the AC curve and the elasticity of the demand curve.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Explain how monopolistically competitive firms determine price and output in the long run

A

In the long run, new firms can enter the industry. This reduces the demand for the firm’s products and so its demand curve shifts to the left and its prices and profits fall. This process continues until all supernormal profits are competed away. So in the long run, monopolistically competitive firms make only normal profits. (AR = AC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Discuss the limitations of a monopolistic model

A
  1. Information is not perfect, so other firms do not enter the market if they are unaware of the supernormal profits or underestimate demand.
  2. Firms differ in their size and cost structures as well as their product.
  3. There is no perfect freedom of entry.
  4. Entry of new firms could reduce the profits of all firms below normal profit level.
    * 5. The simple model concentrates on price and output and ignores non price competition eg product differentiation and advertising.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Excess capacity

A

In the long run, firms under monopolistic competition will produce at an output below that which minimises average cost per unit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Compare monopolistic competition and perfect competition in terms of price and output levels

A

Firms in monopolistic competition will normally:

  • produce less than perfect competition (less than the social optimum)
  • produce at higher prices than perfect competition.
  • firms will not be producing at the least-cost point, they will have excess capacity.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Compare monopolistic competition and perfect competition in terms of efficiency

A

Monopolistic competition leads to a less efficient allocation of resources than perfect competition.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Compare monopolistic competition and monopoly in terms of price and output levels

A

Firms under monopolistic competition may:
- Charge lower prices than monopolists because of freedom of entry of new firms and lack of long run supernormal profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Compare monopolistic competition and monopoly in terms of efficiency

A

Firms under monopolistic competition may be more efficient than monopolists due to competition.

On the other hand monopolists may benefit from economies of scale and invest in research and development to improve efficiency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Interdependence (under oligopoly)

A

This is one the key features of oligopoly. Each firm is affected by it’s rivals’ decisions and its decisions will affect its rivals. Firms recognise this interdependence and take it into account when making decisions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Duopoly

A

A duopoly is an oligopoly where there are just two firms in the market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Collusive oligopoly

A

When oligopolists agree, formally or informally, to limit competition between themselves. They may set out output quotas, fix prices, limit production promotion or development, or agree not to ‘poach’ each other’s markets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Non-collusive oligopoly

A

When oligopolists have no agreement between themselves - formal, informal or tacit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Countervailing power

A

When the power of a monopolist/oligopolistic seller is offset by powerful buyers(like supermarkets) who can prevent the price from being pushed up.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

State two of the key features of oligopoly

A
  1. Barriers to entry - the extend of these will vary between different firms.
  2. Interdependence of firms
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Describe the other features of oligopoly

A

There may be significant differences in:

  • the structure of oligopolistic industries
  • the different behaviour of firms within different oligopolistic industries.
  • market practices within different oligopolistic industries.

In an oligopolistic market:

  • there are usually a small number of firms
  • firms produce differentiated products (eg cars) although some will produce identical products (eg petrol)
  • non price competition is a feature, eg. competition is often over marketing and brand loyalty as well as over price.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Discuss weather oligopoly is beneficial to consumers

A

Oligopoly may not be in the best interests of the consumers if the oligopolists:

  1. Collude to jointly maximise industry profits (so that prices are high).
  2. Are individually too small to benefit fully from economies of scale.
  3. Engage in excessive advertising.

These problems will be smaller if:

  1. The oligopolists do not collude.
  2. There is some degree of price competition
  3. Barriers to entry are weak.
  4. Countervailing power exists.

In some respects, oligopoly may be more beneficial to the consumer than other market structures since:

  1. They use part of their supernormal profit on research and development to improve efficiency and innovation.
  2. Non-price competition through product differentiation may result in greater choice for the consumer.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Discuss oligopoly in the context of contestable markets

A

The lower the entry and exit costs for new firms:

  • The less likely it will be that firms collude and hence make supernormal profits.
  • The more likely is competitive behaviour, to the benefit of the consumer.
21
Q

Cartel

A

A formal collusive agreement.

22
Q

Tacit collusion

A

When oligopolists follow ‘unwrittern’ rules of collusive behaviour, such as price leadership. They will take care not to engage in price cutting, excessive advertising or other forms of competition.

23
Q

Quota (set by a cartel)

A

The output that a given member of a cartel is allowed to produce (production quota) or sell (sales quota)

24
Q

Dominant firm price leadership

A

When firms (the followers) choose the same price as that set by a dominant firm in the industry (the leader)

25
Q

Barometric firm price leadership

A

Where the price leader is one whose prices are believed to reflect market conditions in the most satisfactory way.

26
Q

Average cost of pricing

A

Where a firm sets its price by adding a certain percentage for (average) profit on top of average cost.

27
Q

Price benchmark

A

This is a price which is typically used. Firms, when raising prices, will usually raise them from one benchmark to another.

28
Q

State how collusive oligopolists can limit competition between themselves

A

Having agreed to sell at a specific price, the firms have to divide the market between them. They can do this by:

  • non price competition eg. advertising
  • quotas (this is likely to be based on current market share)

It may be in the interests of the firms in a cartel to erect entry barriers eg by buying up distributors or advertising heavily.

29
Q

Discuss the impact of collusion on industry profits

A

A cartel will maximise profits if it acts like a monopoly, ie profits will be maximised when MR = MC for the industry.

30
Q

State the conditions under which collusion is more likely

A

Collusion is more likely if:

  1. There are few firms
  2. The firms know each other well
  3. The firms are open about costs and production methods and have similar production methods and average costs
  4. The firms produce similar products
  5. There is a dominant firm
  6. There are significant barriers to entry
  7. The market is stable
  8. There are no government measures to curb collusion
31
Q

Describe the forms of tacit collusion

A

Forms of tacit collusion include:

  1. Dominant firm price leadership
  2. Barometric firm price leadership
  3. Average cost pricing
  4. Price benchmarks
  5. Advertising / Product design rules of thumb
  6. Shadow pricing - when firms observe each other’s pricing and ensure that they all remain at similar levels..
32
Q

Discuss the reasons for collusion breaking down

A

Collusion may break down if:

  • There are few factors favouring collusion
  • Individual firms “cheat”

When considering whether to cheat, a firm should consider:

  • How much it is likely to be able to “get away with”
  • Whether it could survive if a price war was resulted
33
Q

Cournot model

A

A model of duopoly where each firm makes its price and output decisions on the assumption that its rival will produce a particular quantity. This is most likely when the market is stable and the rivals have been producing relatively stable quantities for some time.

34
Q

Bertrand model

A

A model where each firm is assumed to set a particular price and stick to it; this is most likely when firms want to avoid changing prices too often.

35
Q

Kinked demand theory

A

A model that assumes oligopolists face a demand curve that is kinked at the current price: demand being significantly more elastic above the current price than below. The effect of this is to create a situation of price stability.

36
Q

Takeover bid

A

When one firm attempts to purchase another by offering to buy the shares of that company from its shareholders.

37
Q

Discuss the likely industry profits under the Cournot and Bertrand models

A

Under the Cournot mode, industry profits will be less than under a monopoly or cartel.
Under the Bertrand model of duopoly, each firm assumes its rival will hold price constant. The result is a price war until all supernormal profit has been competed away.
Under both models, equilibrium profits will be lower than they could be and the resulting equilibrium will be the Nash equilibrium.

38
Q

Explain why the kinked demand model results in stable prices

A

Price stability results from:

  • The reluctance to raise / lower prices (due to the kinked demand curve)
  • The unchanged profit-maximising price and output level if costs change slightly (ie MC moves withing the discontinuous section of the MR curve)
39
Q

Game theory (or the theory of games)

A

The study of alternative strategies that oligopolists may choose to adopt, depending on their assumptions about their rivals’ behaviour.

40
Q

Dominant strategy game

A

Where different assumptions about rivals’ behaviour lead to the adoption of the same strategy.

41
Q

Nash equilibrium

A

The position resulting from everyone making their optimal decision based on their assumptions about their rivals’ decisions.

42
Q

Prisoners’ dilemma

A

Where two or more firms (or people), by attempting independently to choose the best strategy, based upon what other(s) are likely to do, end up on a worse position than if they had co-operated from the start.

43
Q

Tit-for-tat

A

Where a firm will cut prices, or make some other aggressive move, only if the rival does so first. If the rival knows this, it will be less likely to make an initial aggressive move.

44
Q

Credible threat (or promise)

A

One that is believable to rivals because it is in the threatener’s interests to carry it out.

45
Q

First-mover advantage

A

When a firm gains from being the first one to take action.

46
Q

Decision tree (or game tree)

A

A diagram showing the sequence of possible desicions by competitor firms and the outcome of each combination of decisions.

47
Q

Identify and discuss the different strategies that firms might adopt

A

Dominant strategy

Tit for Tat strategy

48
Q

Identify and discuss the different equilibrium positions of a game

A

Dominant equilibrium
Nash equilibrium
Dominant equilibria are a subset of Nash equilibria, ie every dominant equilibrium will also be a Nash equilibrium.

49
Q

Discuss the benefits and limitations of a game theory

A

Benefit:
The advantage of game theory is that it considers all scenarios and so the firm does not need to know which response its rivals will make.

Limitations:

  • However, since it has to estimate the profit to each firm from all scenarios, its usefulness is restricted to relatively simple scenarios.
  • There is a further complication in that the behaviour of oligopolists may change significantly over time, eg from collusion to competition.

Economics for Business (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions