Monopolistic Competition & Oligopolies Flashcards
What is a monopolistically competitive market?
A market in which many firms sell products that are similiar but NOT identical
What does a Monopolistic competitive firm graph look like?
Price is equal to Average Total Cost, demand is down sloping
What do the profits look like in the short and long run?
There are profits in the short run but zero in the long run (just like perfectly competitive firms)
How does advertising affect the elasticity of demand?
Advertising makes consumers more loyal to their brand, making the consumers’ demand INELASTIC which then allows firms to MARKUP the prices of their products
Some firms have an incentive to advertise because they sell a
Differentiated product and charge a price ABOVE marginal cost (P>MC)
Is advertising common in monopolistically competitive firms?
Yes because it creates an incentive to not only attract buyers but also to charge prices above marginal cost
Are oligopolies legal in the United States?
No, U.S forbids firms with similiar products to merge
Why do cartels tend not to last?
Each firm in the cartel has a dominant strategy to be uncooperative and defect from the cartel agreement
Oligopolies would like to act like a
Monopoly, but self-interest often drives them closer to the perfectly competitive outcome
What is a dominant strategy?
Choosing the best payoff regardless of what the other player does (think of the golden ball video)
What is a Nash Equilibrium?
When BOTH parties choose the dominant strategy (think of the golden ball video)
