Reading 13: The Firm and Market Structures Flashcards
What is the optimal price and output in oligopoly markets?
Kinked demand curve model: Optimal price is the prevailing price.
Dominant firm model: Output level where MC = MR for leader.
In Cournot’s assumption, each firm assumes rivals have no response to actions.
In Nash equilibrium, firms respond with profit-maximizing decisions.
List the characteristics of an oligopoly.
Small number of sellers.
Products may be differentiated by brand, quality, features, or marketing, or be homogenous but are close substitutes.
High entry costs; significant entry barriers.
Firms enjoy substantial pricing power.
List solutions to monopoly markets.
A marginal cost-pricing structure with subsidies.
An average cost-pricing structure.
National ownership.
Franchising the monopoly via a bidding war.
Name the characteristics of perfect competition.
There are many buyers and sellers, each with an identical product for sale.
There are minimal barriers to entry.
Sellers have no pricing power.
No nonprice competition.
Note: Schumpeter’s take on perfect competition when there is no competitive advantage is that there will be a long-run equilibrium until someone comes up with a new innovative product or process.
List the factors affecting price elasticity of demand.
Higher price elasticity if close substitutes.
Higher if a greater share of income spent.
Higher in the long run.
Along the demand curve, price elasticity is higher (lower) at higher (lower) prices.
Note:
Inelasticity: P↑⇒↓TR
Elastic portion:P↑⇒↑TR
P=Price,TR=Total Revenue
Name the factors affecting chances of successful collusion.
Fewer firms or one dominant (i.e., less competition); few substitutes.
Similar products and cost structures.
Small or more frequent orders.
There is minimal threat of retaliation from other firms in the industry.
Name the characteristics of a monopoly.
Single seller of a highly differentiated product, which has no close substitutes.
The product is differentiated through nonprice strategies.
There are high barriers to entry and considerable pricing power.
How are equilibrium price and output determined?
At the intersection point of the market demand and supply curves.
List the characteristics of monopolistic competition.
Large number of buyers and sellers.
Similar products; differentiation based on advertising and other nonprice strategies.
Low barriers to entry and exit.
Firms have some pricing power.
Explain first-degree price discrimination and explain when second- and third-degree price discrimination occurs.
When a monopolist charges each individual consumer the highest possible price.
Second-degree price discrimination occurs when a monopolist sells small quantities at the marginal price and large quantities at a higher price based on quantities purchased by various consumers at various prices.
Third-degree price discrimination occurs when customers can be separated by geographical or other traits. One set of customers is charged a higher price, while the other is charged a lower price.
Generally, what is the supply analysis in monopoly markets?
The profit-maximizing output level occurs at the point where MR = MC.
The price is determined from the demand curve (based on the profit-maximizing quantity).
Identify the factors that give rise to monopolies.
Control over critical sources of production
Patents or copyrights
Network effects, which result from synergies related to increasing market penetration
Government-controlled authorization
Define cross elasticity of demand.
It measures the responsiveness of demand for a product to a change in the price of another product.
Distinguish between monopolistic competition and perfect competition.
Monopolistic competition produces lower output and charges a higher price than perfect competition.
In perfect competition, price equals marginal cost, while in monopolistic competition, price exceeds marginal cost.
Give the formula used to calculate marginal revenue (MR) and express the relationship between MR and price elasticity.
MR = ΔTR/ΔQD
MR = P[1 − (1/EP)]
What is the N-firm concentration ratio? List two disadvantages.
The aggregate market share of the N largest firms in the industry. The ratio will equal 0 for perfect competition and 100 for a monopoly.
Disadvantages: (1) It does not quantify market power. (2) It is unaffected by mergers in the top tier.
