Week 4 - Imperfect Competition

Question 1

Monopolistic Competition assumption (6)

Answer 1

• A large number of small firms
• Free entry and exit in the LR
• Each firm produces a differentiated product - it has a niche, there is a thus some brand loyalty
• Each product is an imperfect substitute
• Each firm faces a downward sloping demand curve
• Each firm has a u-shaped AC curve

Question 2

Interpret a monopolistic competition short run diagram (3)

Answer 2

• The firm believes just like a monopolist
• The firm produces Q* level of output and changes price p*
• Unlike monopoly, there is a free entry and exit in the LR

Question 3

Interpret a monopolistic competition long run diagram

Answer 3

• No barriers to entry
• Firms demand curve shifts down and becomes more elastic
• P* = AFC, this abnormal profit disappears with prices lower than under monopoly
• If P < ATC the firm would shut down
• P > MC so the profit is higher than under perfect competition

Question 4

Characteristics of oligopolies

Answer 4

• There are a few firms with high market shares
• The decisions of firms in terms of what profit to change, or what quantity to produce is dependent on the other firms in the market

Question 5

Oligopoly assumptions (5)

Answer 5

• 2 or 3 firms (much fewer firms than monopolistic competition)
• Each firm has a differentiated product (significant brand loyalty e,g Nandos, Wagamamas, pizza expresss)
• High entry/exit costs
• Some ability to influence market price
• Strategic interactions between firms when it comes to price

Question 6

Interpret a kinked demand curve (oligopoly curve)

Answer 6

• If price goes up - firm will lose market share as other firms will keep prices low
• If price goes down - all other rivals will follow therefore market share remains unchanged
• But as prices go down sales will rise as we have a downward sloping demand curve and firms wil always try to avoid a price war as this will reduce abnormal profit

Question 7

Competition in an oligopoly market (5)

Answer 7

Competition is non priced such as:

• product quality
• Customer focus
• Advertising
• Product development
• Branding

Question 8

Summary of market structure (just tiurn over to refresh key points)

Answer 8

Question 9

What is game theory? (2)

Answer 9

• Game theory helps us understand strategic interactions
• Game theory can be used to determine strategies in the business world

Question 10

Define dominant strategy

Answer 10

The player maximises their pay off by playing a common strategy regardless of the actions of other players

Question 11

Define pure strategy Nash equilibrium

Answer 11

Each player chooses their best strategy, given the struggles chosen by other players