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ECO1017 > Monopolistic competition and oligopoly > Flashcards

Monopolistic competition and oligopoly Flashcards

1
Q

What does imperfect competition refer to?

A

Market structures that fall between perfect competition and pure monopoly

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2
Q

What is monopolistic competition a type of?

A

Imperfect competition

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3
Q

Define monopolistic competition

A

A market structure in which many firms are selling products that are similar but not identical

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4
Q

What markets have monopolistic competition?

A

Markets that have some features of competition and some features of monopoly

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5
Q

What are 3 characteristics of monopolistic competition?

A

Many sellers
Product differentiation
Free entry and exit

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6
Q

Explain the many sellers characteristic of monopolistic competition

A

There are many firms competing for the same group of customers

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7
Q

Explain the product differentiation characteristic of monopolistic competition

A

Each firm produces a product that is at least slightly different from those of other firms
Rather than being a price taker, each firm faces a downward-sloping demand curve

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8
Q

Explain the free entry and exit characteristic of monopolistic competition

A

Firms can enter or exit the market without restriction

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9
Q

What encourages new firms to enter the market?

A

Short-run economic profits

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10
Q

What 4 things happen when new firms enter the market?

A

The number of products offered increases
The demand faced by firms already in the market decreases
Incumbent firms’ demand curves shift to the left
Demand for incumbent firms’ products fall, and their profits decline
(incumbent means firms already in the market in this case)

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11
Q

How do monopolistic competitors maximise their profit?

A

By producing the quantity at which marginal revenue equals marginal cost

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12
Q

When would a monopolistic competitor make profit?

A

When price is above average total cost for that quantity

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13
Q

When would a monopolistic competitor make a loss?

A

When price is below average total cost for that quantity

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14
Q

What encourages firms to exit the market?

A

Short-run economic losses

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15
Q

What 4 things happen when firms exit a market?

A

The number of products offered decreases
The demand faced by remaining firms increases
The remaining firms’ demand curves shift to the right
The remaining firms’ profits increase

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16
Q

What is the profit-maximising quantity called when the firm is making a loss?

A

The loss-minimising quantity

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17
Q

What happens in the long-run equilibrium in terms of entry and exit?

A

Firms will enter and exit until the firms are making exactly zero economic profits

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18
Q

What happens to the demand curve in the long-run equilibrium?

A

The demand curve is tangential to the average total cost curve

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19
Q

What happens to the price in long-run equilibrium?

A

Price equals average total cost

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20
Q

What happens when the long-run equilibrium is reached?

A

No new firms have any incentive to enter and no existing firms have any incentive to leave

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21
Q

What are two characteristics in terms of long-run equilibrium?

A

As in a monopoly, price exceeds marginal cost and because MC = MR, price is greater than MR, meaning that the MR curve is lower than the demand curve
As in a competitive market, price equals average total cost

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22
Q

Why does price exceed marginal cost in the long-run equilibrium?

A

Profit maximisation requires marginal revenue to equal marginal cost
The downward sloping demand curve makes marginal revenue less than price.

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23
Q

What are the two differences between monopolistic and perfect competition?

A

Excess capacity

Mark-up

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24
Q

What happens to excess capacity in perfect competition in the long-run?

A

There is no excess capacity in perfect competition in the long run

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25
Q

Why isn’t there any excess capacity in perfect competition in the long-run?

A

Because free entry results in competitive firms producing at the point where average total cost is minimised, which is the efficient scale of the firm

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26
Q

What happens to the excess capacity in monopolistic competition in the long-run?

A

There is excess capacity in monopolistic competition in the long-run

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27
Q

Why is there excess capacity in monopolistic competition in the long-run?

A

Output is less than the efficient scale of perfect competition

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28
Q

What does price equal in perfect competition?

A

Price equals marginal cost

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29
Q

What does price equal in monopolistic competition?

A

Price is above marginal cost

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30
Q

What do monopolistic firms have a mark up over?

A

They have a mark-up over marginal cost

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31
Q

Why do monopolistic firms have a mark up over marginal cost?

A

As price exceeds marginal cost, an extra unit sold at the posted price means more profit for the monopolistically competitive firm

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32
Q

Where can the excess capacity be found on a graph?

A

It is the point between the efficient scale (flat part of ATC) and the quantity produced (where the demand curve tangents the ATC)

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33
Q

Where can you find the mark up on the graph?

A

It is the point between the price and the marginal cost

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34
Q

What causes normal deadweight loss of monopoly pricing in monopolistic competition?

A

The mark up of price over marginal cost causes deadweight loss

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35
Q

Why is the pricing of monopolistic firms as regulated as monopolies?

A

The administrative burden of regulating the pricing of all firms that produce differentiated products would be overwhelming

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36
Q

Explain product-variety externality

A

Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers

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37
Q

Explain business-stealing externality

A

Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms

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38
Q

Why do businesses advertise?

A

To attract more buyers to their products

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39
Q

How much do firms that sell highly differentiated consumer goods spend on advertising?

A

Firms that sell highly differentiated consumer goods spend a lot on advertising

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40
Q

How much do firms that sell industrial products typically spend on advertising?

A

Firms that sell industrial products typically spend very little on advertising

41
Q

How much do firms that sell homogeneous products spend on advertising?

A

Firms that sell homogeneous products spend nothing at all

42
Q

What are two criticisms of advertising?

A

Firms advertise in order to manipulate people’s tastes

It impedes the competition by implying that products are more different than they actually are

43
Q

What are 3 positives about advertising?

A

Provides information to consumers
Increases competition by providing a greater variety of products and prices
The willingness of a firm to spend on advertising dollars can be a signal to consumers about the quality of the product being offered

44
Q

What is a disadvantage of brand names?

A

They can cause consumers to perceive differences that don’t exist

45
Q

What is an advantage of brand names?

A

They are a useful way for customers to ensure that the goods they are buying are of high quality

46
Q

Why do brand names suggest the good is of high quality?

A

Brand names provide information about quality

Having a brand name gives a firm an incentive to maintain high quality

47
Q

Who developed the theory of contestable markets?

A

William J. Baumol
John Panzar
Robert Willig

48
Q

When was the theory of contestable markets developed?

A

In 1982

49
Q

What is the theory of contestable markets?

A

Firms are influenced by the threat of new entrants into a market, the more contestable a market is, the lower the barriers to entry, this means that firms might not maximise their profit

50
Q

What 3 things according to the theory of contestable markets mean that profits are limited?

A

Entry limit pricing
Predatory or destroyer pricing
Hit and run tactics

51
Q

Define entry limit pricing

A

A situation where a firm will keep prices lower than they could be in order to deter new entrants

52
Q

Define predatory or destroyer pricing

A

A situation where a firm holds price below average cost for a period to try and force out competitors or prevent new firms from entering the market

53
Q

Define hit and run tactics

A

Take profit and leave

54
Q

Define oligolpoly

A

A market structure in which only a few sellers offer similar or identical products

55
Q

What are oligopolistic markets dominated by?

A

A few large firms that are interdependent

56
Q

How should firms behave in oligopolies?

A

They should behave strategically

57
Q

What is game theory?

A

The study of how people behave in strategic situations

58
Q

What are strategic decisions?

A

Those in which each person, in deciding what actions to take, must consider how others might respond to the action

59
Q

What would oligopolies like to do?

A

Reach the monopoly outcome

60
Q

How can oligopolies turn into monopolies?

A

Through cooperation

61
Q

Why must firms in oligopolies act strategically?

A

Because there are only a small number of firms

62
Q

What does the profit of each firm in an oligopoly depend upon?

A

The amount the firm produces and the amount other firms in the oligopoly produce

63
Q

What does each firm in an oligopoly know about its strategic decision?

A

That the other firms in the oligopoly have the same strategic decisions to make

64
Q

What is the pay off matrix?

A

A table showing the possible combination of outcomes depending on the strategy chosen by each player

65
Q

What is the pay off for each firm in an oligopoly pay off matrix?

A

The profit they make as a result of the agreement

66
Q

What are the two possible strategies of a pay off matrix?

A

Keep the agreement or break the agreement

67
Q

Why is cooperation difficult to maintain even when mutually beneficial?

A

Because there is still a better option for the individual which has a worse impact for the other

68
Q

Define dominant strategy

A

A strategy that is best for a player regardless of the strategies chosen by the other players

69
Q

Define nash equilibrium

A

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen

70
Q

What situation would cause a Nash equilibrium?

A

One in which all economic actors choose their dominant strategy

71
Q

What happens to the Nash equilibrium if dominant strategies don’t exist?

A

The situation needs to be checked to see if any actor wants to deviate, if no actor wants to deviate then it is a Nash equilibrium

72
Q

What are two types of imperfectly competitive markets?

A

Oligopoly

Monopolistic competition

73
Q

Define oligopoly

A

A market structure in which only a few sellers offer similar or identical products

74
Q

Define monopolistic competition

A

A market structure in which many sellers offer similar but not identical products

75
Q

What does the concentration ratio measure?

A

The proportion of the total market share of a particular number of firms

76
Q

How much power do typical firms in an oligopoly have?

A

They have some market power but this market power is not as great as if it were a monopoly

77
Q

What are the two characteristics of an oligopoly?

A

Only a few firms

Limited entry

78
Q

What is there tension between in an oligopoly?

A

Between cooperation and self interest

79
Q

What is a group of oligopolists better off doing in terms of cooperation and self interest?

A

Better off cooperating

80
Q

What provides an incentive for oligopolies not to cooperate?

A

Profit

81
Q

What limits the group of oligopolists to act as a monopoly?

A

Profit encourages firms to go alone

82
Q

Define duopoly?

A

An oligopoly with only two members

83
Q

What is the simplest type of oligopoly?

A

A duopoly

84
Q

What happens as the size of an oligopoly grows?

A

It looks more and more like a competitive market
Lower concentration ratio
The price approaches marginal cost, and the quantity produces approaches the socially efficient level

85
Q

What happens if the oligopolists cooperate and agree on a monopoly outcome?

A

They can get a higher profit than when they are competing

86
Q

Define collusion

A

An agreement among firms in a market about quantities to produce or prices to change

87
Q

Define cartel

A

A group of firms acting in unison

88
Q

From which standpoint is cooperation among oligopolists undesirable?

A

From society as a whole

89
Q

Why is cooperation among oligopolists undesirable from a society point of view?

A

It leads to production that is too low and prices that are too high

90
Q

What do competition laws prohibit in terms of monopolies?

A

They prohibit explicit agreements among oligopolists as a matter of public policy

91
Q

What is it illegal to do?

A

It is illegal to restrain trade or attempt to monopolize a market

92
Q

Who enforces competition law in the UK?

A

The Office of Fair Trading (OFT)

93
Q

How does the European Commission apply EU anti-trust rules?

A

It has a number of investigative powers to help it apply the rules and may fine business undertakings that violate them

94
Q

When is cooperation easier to enforce?

A

It is easier to enforce if the game is repeated, this is because any short term gain from a one off achievement will be ore than offset by future losses

95
Q

What happens as each oligopolist tries to break the agreement?

A

Total production rises and price falls

96
Q

How does an oligopolist break agreement?

A

It raises production and captures a larger share of the market

97
Q

What is VER?

A

Voluntary Export Restraints

98
Q

When did Japanese automobile companies agree to VER?

A

1980s

99
Q

What did Japan do as a result of the VER?

A

It reduced exports to the US

ECO1017 (16 decks)

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