Monopolistic Competition + Oligopoly Flashcards
In the long run firms in perfect competition can only make
Normal profits / cover their oppurtunity cost
Perfect competition assumes (4)
Many small buyers and sellers
No barriers to entry or exit
Homogeneous products
Perfect information
Monopolistic competition assumes (3)
many Small buyers and sellers
Low barriers to entry and exit
Differentiated products
Difference between monopolistic competition and perfect competition
Perfect Competition - Homogenous products
Monopolistic competition - Differentiated products
What does low barriers to entry or exit imply (3)
no eos
few patents
Low sunk costs
what is meant by a sunk cost
a sunk cost refers to a cost that has already been incurred and cannot be recovered or changed, regardless of future decisions.
Explain what happens as a monopolistically competitive market moves to its long run equilibrium. (4 marks)
In the short run, if a monopolistically competitive firm is making supernormal profit, it will incentivise new firms to enter the market.
There are low barriers to entry, so new firms will enter the market, stealing customers from existing (or incumbent) firms.
This will decrease their demand (or AR), shifting AR and MR down, until AR just touches the firm’s AC curve - so only normal profit will be left and all the supernormal profit is gone,.
Potential suppliers outside the market will no longer enter the market because they can no longer make supernormal profit, so we have reached the long run equilibrium.
How is an oligopoly characterized (4)
1.a few larger sellers
2. high barriers to entry
3. interdependence
4. differentiated goods
What is an example oligpoly
Soda market
Coca cola and pepsi
Explain two possible sunk costs involved in entering the fizzy drinks market. (4 marks)
Like advertising. Pepsi-co and Coca Cola spend millions advertising their fizzy drinks, but once paid, they can’t recover the money spent on billboards or TV ads, so advertising is a huge sunk cost.
Secondly, R&D. There’s no way to recover the costs of researching and developing a new fizzy drink recipe - so R&D is also a sunk cost!
Why are fizzy drink almost always priced the same (2)
The fizzy drinks market is oligopolistic so firms are interdependent: one firm’s action will directly affect another firm.
what is meant by collusion and what are the two types
When two firms agree to keep a price fixed at a high price,
Overt collusion
What is overt collusion
when there is a formal agreement between firms to collude.
What is tacit collusion
When there is no formal agreement to collude.
What is the CMA
Competition and markets authority, made collusion illegal
What is meant by whistleblowing in the context of collusion
Admitting to overt collusion in order to get immunity and force your competitor with whom you have colluded to lose profit.
What is meant by a cartel
Several suppliers of the same good who collude together on the price of the good.
Peter sees that Mandeep sells their chicken for 50p a wing. So Peter will also sell his chicken at 50p a wing - why?
If Peter sets a lower price (e.g. 40p), Mandeep will retaliate with an even lower price (e.g. 35p), and a price war will soon break out. Prices will be driven so low, neither firm will be able to make a profit. So Peter won’t want to decrease price.
What are price wars
One firm undercuts another leading to a sequence of consequential cuts in attempts to steal the other firms consumers
What is predatory pricing
When a firm aggressively cuts the price of its good to force out other firms. When a firm drops its price below its short run shutdown point
Where is a firms short run shutdown point
Where AVC = AR
What is the short run and long run impacts of effective predatory pricing
SR: AR < AVC = loss
LR: get rid of competition, increase price = profit
What is limit pricing
When an incumbent firms sets a price low enough to stop other firms from entering the market, which it is able to do because of eos lowering average costs.
What are some forms of non price competition (4)
Advertising
Branding
Quality
Loyalty cards
