Oligopoly And Monopolistic Competition Flashcards
Oligopoly characteristics (3)
Small number of large firms
Product differentiation
Interdependence
What does product differentiation enable
Some degree of price setting power.
I.e a higher price than rivals doesn’t always mean a loss of sales
What does a firms demand curve look like in MC
Elastic-flatter than normal demand curve as some switch to rival firms when price rises.
Monopolistic competition-what happens in short run n long run
Short run-profit earns
Free entry means new firms enter,so AR/MR fall until profits are competed away where P (AR)=MC
Comparing monopolistic vs perfect
Perfect operate at lowest on AC curve
MC operate at lower output and higher AC cost
Both operate at P=AC in long run
In MC consumers pay higher price.
However get differentiated products (more choice)
Price vs variety
What does demand curve in oligopoly look like and why?
Kinked-elastic then inelastic
An increase in price of one brand,
other firms do not follow suit so elastic. (They gain market share). Q falls more than the price change.
A fall in price of one brand,
Firms follow suit to avoid losing market share.
The brand still gains some customers, but Q less responsive to price than a price rise
Why is gap of discontinuity through MR
For each section of the AR curve
The MC curve can pass through any point of the gap, and the profit maximising output remains constant.
What is a dominant strategy in game theory
Strategy that earns more than all others, against any rival strategy
Note: not always exists, so use concept of best reply
Best reply
Taking other strategies as given, it maximises this players payoff
Nash equilibrium definition and what does it mean
Every players strategy is a best reply to other players, meaning
No incentive to deviate, but not necessarily a good outcome
