Week 10: Monopolistic Competition and Oligopolies

Question 1

Perfect Competition

Answer 1

No market power

Question 2

Monopolistic Competition

Answer 2

Some market power

Question 3

Monopoly Competition

Answer 3

: Complete market power

Question 4

Oligopoly competition

Answer 4

a lot of market power

Question 5

Order the 4 types of competition from least to most power

Answer 5

perfect, monopolistic, oligopoly, monopoly

Question 6

Oligopolies:

Answer 6

• Few sellers
• Barriers to entry
• Interdependence
• Firms decisions depend heavily on what other firms do (if they do this, I will do this)
• Need a model that can help us think through strategic behavior (game theory)

Question 7

Collusion -

Answer 7

is a non-competitive, secret, and sometimes illegal agreement between rivals which attempts to disrupt the market’s equilibrium. The act of collusion involves people or companies which would typically compete against one another, but who conspire to work together to gain an unfair market advantage

Question 8

Strategic pricing behaviour -

Answer 8

uses different factors, like product value and consumer demand, to determine how to price products and services.

• You can have bargaining power

Question 10

Other applications of game theory:

Answer 10

1. Original prisoner’s dilemma
2. Collective actions like strikes and protests
3. Financial industry actions
4. Climate change
5. Macroeconomics: inflation explanation

Question 11

Prisoners dilemma

Answer 11

The prisoner’s dilemma is a game theory thought experiment that involves two rational agents, each of whom can cooperate for mutual benefit or betray their partner for individual reward.

If they both work together = they both benefit the most

If they both don’t work together = they get a smaller benefit

If one tries to work together and the other doesn’t = one the who tried to work together gets burned the worst while the selfish one gets the benefits without any work.

Question 12

Perfectly competitive markets:

Answer 12

• Large numbers of buyers and sellers
• Free entry and exit
• Perfect information
• Homogenous products (each shirt is identical)

Question 13

Perfectly competitive markets demand curve

Answer 13

horizontal

Question 14

Monopolistically Competitive Markets:

Answer 14

• Large numbers of buyers and sellers
• Free entry and exit
• Perfect information
• Product differentiation (different products)
• If the sellers attempts to charge more or increase the price the outcome depends on how different and desired the sellers T-shirts / products are

Question 15

The centrality of product differentiation

Answer 15

• The more differentiated your product is, the more preference people have for it, the more pricing power you get as a seller.
• Differences can be real or perceived

Question 16

How to differentiate your products?

Answer 16

• Social media
• Advertisements
• Spokespeople
• Slogans/Jingles
• Commercials

Question 17

Conspicuous consumption

Answer 17

the purchase of goods and services for the specific purpose of displaying one’s wealth

Question 18

Summary of monopolistic competition:

Answer 18

Why is it important:
- Product differentiation gives sellers some control over pricing
- The more distinct the product, the more control / power the seller has

Question 19

How to differentiate products:

Answer 19

On merit: better quality, design, taste, durability

Manufacture preference through branding, advertising, pricing, and status