Monopoly and Oligopoly Flashcards
What is a monopoly?
A market structure where one firm dominates the market
A monopoly has a single seller that can supply the entire market demand.
What is the significance of market control in a monopoly?
The monopolist has significant control over the market supply but faces a downward slope demand curve
This means that the monopolist can influence prices but must consider how price changes affect demand.
What choices does a monopolist have regarding price and quantity?
A monopolist can control price or quantity, but not both
Controlling both leads to excess supply or demand.
What is the condition for profit maximization in a monopoly?
Profit maximization occurs where MC = mR
MC = Marginal Cost, mR = Marginal Revenue.
What happens when a monopolist sells an extra unit?
It impacts revenue positively for the marginal unit and negatively for previous sales
The price drop affects all prior sales (infra-marginal units).
How does the marginal revenue curve behave in a monopoly?
The marginal revenue curve is downward sloping at twice the rate of the demand curve
It can even be negative, indicating that total revenue decreases as sales increase.
How do monopoly and perfect competition compare?
Monopoly has higher prices and lower quantity; consumer surplus is lower
It results in big profits for firms and is considered the worst outcome for consumers.
What is deadweight loss?
Loss of economic efficiency resulting from monopoly pricing
It occurs when the equilibrium for goods is not achieved.
What characterizes an oligopoly?
A market structure with a small number of big powerful firms competing
Firms in an oligopoly are interdependent and closely monitor each other’s actions.
What is price competition in oligopoly?
Firms offer homogenous products and compete primarily on price
This can lead to a ‘race to the bottom’ where firms continuously lower prices.
What incentives exist for firms in an oligopoly to avoid price wars?
Firms may differentiate their products or implement loyalty schemes
Examples include branding quality and frequent flyer programs.
What is quantity competition in oligopoly?
Firms produce identical products but compete on quality
Each firm must anticipate competitors’ production decisions to avoid price decreases.
What is the risk associated with output decisions in oligopoly?
Making errors in output decisions can lead to price decreases
This creates a strong incentive for firms to collude.
What is the concentration ratio?
A simple number that measures the market share of firms in the market
It helps classify markets based on the level of concentration.
How is the Herfindahl-Hirschman Index (HHI) calculated?
By summing the square of company market shares
It is used to classify markets into unconcentrated, moderately concentrated, and highly concentrated.
What does an HHI score of 10,000 indicate?
A perfect monopoly where one firm controls the entire market
This represents extreme market concentration.
