MS: Monopolistic Competition and Oligopoly

Question 1

Monopolistic Competition

Answer 1

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

Question 2

Short-run Economic Profits

Answer 2

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)

Question 3

Short-run Economic losses

Answer 3

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)

Question 4

Long-run Equilibrium

Answer 4

• Like monopolies, price exceeds marginal costs
• Like CM, price = ATC
• Free entry and exits make economic profit 0

Question 5

Monopolistic vs PC

Answer 5

1. 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)
2. Mark-up Over Marginal Cost: competitive firm P = MC, monopolistically competitive firm P > MC
   (graph)

Question 6

MC and Welfare of Society

Answer 6

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

Question 7

Advertising

Answer 7

• 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

Question 8

Oligopoly

Answer 8

When there are only a few sellers, each offering similar or identical products
- limited by competition laws as a matter of public policy

Question 9

Concentration Ratio

Answer 9

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

Question 10

Market Segment

Answer 10

Breaking down customers into groups with similar buying habits or characteristics

Question 11

Oligopolistic Markets

Answer 11

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

Question 12

Duopoly

Answer 12

An oligopoly with only two members

Question 13

Collusion

Answer 13

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

Question 14

Cartel

Answer 14

A group of firms acting in unison.

Question 15

Increasing size of Oligopoly

Answer 15

1. The output effect: : because price is above marginal cost, selling
   more at the going price raises profits.
2. The price effect: : raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold.

Question 16

Game Theory

Answer 16

The study of how people behave in specific situations shown through the ‘payoff matrix’ (table shows all possible outcomes)

Question 17

Nash Equilibrium

Answer 17

A situation whereby economic actors interact with one another each choosing the best strategy given what the other actors have chosen.

Question 18

Entry Barriers to Equilibrium

Answer 18

• 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

Question 19

Cooperative vs Non-Cooperative game theory

Answer 19

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.