Monopolistic Competition and Oligopoly

Question 1

Monopolistic Competition

Answer 1

Competitive market structure with a downwar sloping demand curve and the ability for the firm to make supernomal profits in the short run.

Question 2

Characteristics of Monopolistic competition

Answer 2

Many firms, differentiated products, few barriers to entry and exit, no dominant firm, downward sloping demand curve.

Question 3

Type of profits firms in monopolistic competition market make in the SR.

Answer 3

Supernormal

Question 4

What happens to the demand curve for an individual firm in the LR?

Answer 4

It becomes flatter and demand becomes more elastic. It also moves to the left.

Question 5

In the long run, what type of profits are made in monopolistically competitive markets?

Answer 5

Normal

Question 6

How do firms differentiate their products?

Answer 6

Non-price competition and advertising.

Question 7

Are MC firms efficient?

Answer 7

No- they do not operate at lowest average costs or where P=MC.

Question 8

What are the welfare benefits of MC?

Answer 8

Greater choice of products for consumers and an incentive for firms to innovate.

Question 9

What are the welfare and efficiency losses with MC?

Answer 9

Lack of economies of scale as firms cannot grow in the market; advertising can be seen as wasteful; not productively or allocatively efficient in SR or LR.

Question 10

Oligopoly

Answer 10

Market structure with a few dominant firms

Question 11

Interdependence

Answer 11

Where firms base their decision making on the decisions of other firms in the market.

Question 12

Non-price competition

Answer 12

Firms compete on other aspects than price such as product, location and branding.

Question 13

Characteristics of oligopoly

Answer 13

Few dominant sellers, interdependence, barriers to entry, differentiated products, non-price competition.

Question 14

Differentiated products

Answer 14

Where products are distinguished from competitors’ products by branding and advertising; after sales service; extra features; location or perfromance and reliability

Question 15

Non-price competition

Answer 15

Firms choose not to compete on price but on advertising or branding.

Question 16

Sticky prices

Answer 16

Scenario in which the price of the good is slow to change despite changes in the market that suggest a different price is optimal.

Question 17

Collusion

Answer 17

Scenario where firms work together in secret to gain an unfair market advantage.

Question 18

Overt collusion

Answer 18

Scenario where firms work together with a formal agreement.

Question 19

Tacit collusion

Answer 19

Scenario where firms work together without a formal agreement often by observing other firms in the market.

Question 20

Concentration ratio

Answer 20

Way of measuring the market dominance of the top few firms in the market by adding up each firm’s individual market share and looking at this as a percentage of the total market.

Question 21

Calculation of the concentration ratio

Answer 21

(Total sales of the top ‘n’ number of firms/ Sales of the entire market)*100

Question 22

Game Theory

Answer 22

Developed by economist John Nash, this theory considers the best outcome for firms in an oligpolistic market. It states all firms should make their decisions based on the likely actions of the other firms and no firm should make a decision in isolation.