MS: Monopolistic Competition and Oligopoly Flashcards
Monopolistic Competition
Specific type of imperfect competition:
- Markets that hold features of both monopolies and perfect competition.
Characteristics:
1. Hold many sellers that are competing in the same pool of customers
2. Product differentiation that allows products in each firm to be slightly different from one another: downward sloping demand curve rather than being a price taker
3. Free entry and exit into the market
Short-run Economic Profits
Encourages new firms to enter the market increasing products offered and reducing demand faced by firms already present.
- Demand curve shifts to the left as product and demand declines
(graph)
Short-run Economic losses
Encourages firms to exit the market, decreasing the number of products offered while increasing demand faced by remaining firms .
- Demand curve shifts to the right increasing a firms profits
(graph)
Long-run Equilibrium
- Like monopolies, price exceeds marginal costs
- Like CM, price = ATC
- Free entry and exits make economic profit 0
Monopolistic vs PC
- Excess Capacity: no excess capacity in long run PC (free entry = competitive firms produce at a point where ATC is minimised effecting scale of the firm), excess capacity in monopolistic long run (output < efficient scale of PC)
(graph) - Mark-up Over Marginal Cost: competitive firm P = MC, monopolistically competitive firm P > MC
(graph)
MC and Welfare of Society
MC doesn’t have all the
desirable properties of perfect competition:
- There’s deadweight loss of monopoly pricing in MC caused by the mark-up of price over marginal cost
Advertising
- Firms that sell highly differentiated consumer goods spend a lot
on advertising. - Firms that sell industrial products typically spend very little on
advertising. - Firms that sell homogeneous products spend nothing at all.
Firms WTP on advertising may act a signal to consumers about the quality of the product
Oligopoly
When there are only a few sellers, each offering similar or identical products
- limited by competition laws as a matter of public policy
Concentration Ratio
The proportion of the total market share of a particular number of firms
Market Segment
Breaking down customers into groups with similar buying habits or characteristics
Oligopolistic Markets
Dominated by a few large firms that are interdependent
- tension between self-interests and cooperation:
Oligopolists better off acting as a monopoly and charging above MC
Profits received provides an incentive to go alone with limits the group acting as a monopoly
Duopoly
An oligopoly with only two members
Collusion
An agreement among firms in a market about quantities to produce
or prices to charge.
Cartel
A group of firms acting in unison.
Increasing size of Oligopoly
- The output effect: : because price is above marginal cost, selling
more at the going price raises profits. - The price effect: : raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold.
Game Theory
The study of how people behave in specific situations shown through the ‘payoff matrix’ (table shows all possible outcomes)
Nash Equilibrium
A situation whereby economic actors interact with one another each choosing the best strategy given what the other actors have chosen.
Entry Barriers to Equilibrium
- Higher unit costs because they dont have the same economies of scale as existing larger oligopolies
- Existence of patents
- High set up costs including the need for heavy advertising
- Brand Proliferation: the production of a number of products within a product line as different brands
Cooperative vs Non-Cooperative game theory
Cooperative: A set of outcomes that is known to each player and each player has preferences over these outcomes
Non-Cooperative: Assume the players have a series of strategies that they could use to gain an outcome, each player has a preference over their outcome.
