a market situation in which a relatively large number of sellers offer similar but not identical products.
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Collusion is
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a situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition
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Product differentiation and other types of nonprice competition give the individual firm some degree of monopoly power that the purely competitive firm does not possess.
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True
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Allocative efficiency occurs when
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price = marginal cost, i.e., where the right amount of resources are allocated to the product.
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Productive efficiency occurs when
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price = minimum average total cost, i.e., where production occurs using the least-cost combination of resources
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The gap between price and marginal cost for each firm creates
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an efficiency (or deadweight) loss industry-wide.
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A monopolistically competitive producer may be able to postpone the long-run outcome of just normal profits through
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product development and improvement and advertising.
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The monopolistically competitive firm juggles what factors in seeking maximum profit?
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product attributes, product price, and advertising
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Oligopoly exists where
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a few large firms producing a homogeneous or differentiated product dominate a market
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Barriers to entry Oligopoly
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-Economies of scale may exist due to technology and market share.
-he capital investment requirement may be very large.
-Other barriers to entry may exist, such as patents, control of raw materials, preemptive and retaliatory pricing, substantial advertising budgets, and traditional brand loyalty.
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The kinked-demand model assumes
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a noncollusive oligopoly.
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Cartels and collusion agreements
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constitute another oligopoly model.
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A cartel is
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a group of producers that creates a formal written agreement specifying how much each member will produce and charge
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many obstacles to collusion
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Differing demand and cost conditions among firms in the industry;
A large number of firms in the industry;
The incentive to cheat;
Recession and declining demand (increasing ATC);
The attraction of potential entry of new firms if prices are too high; and
Antitrust laws that prohibit collusion.
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Price leadership is
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is a type of gentleman's agreement that allows oligopolists to coordinate their prices legally; no formal agreements or clandestine meetings are involved. The practice has evolved whereby one firm, usually the largest, changes the price first and, then, the other firms follow.
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Several price leadership tactics are
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a. Prices are changed only when cost and demand conditions have been altered significantly and industry-wide.
b. Impending price adjustments are often communicated through publications, speeches, and so forth. Publicizing the "need to raise prices" elicits a consensus among rivals.
c. The new price may be below the short-run profit-maximizing level to discourage new entrants.
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Oligopoly is difficult to analyze primarily because
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the price and output decisions of any one firm depend on the reactions of its rivals
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A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from
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product differentiation
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Industries X and Y both have four-firm concentration ratios of 65 percent, but the Herfindahl index for X is 1,500 while that for Y is 2,000. These data suggest
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greater market power in Y than in X
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The terms strategic behavior and payoff matrix both relate directly to
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Game theory
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The kinked-demand curve of an oligopolist is based on the assumption that:
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competitors will follow a price cut but ignore a price increase.
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Oligopolistic firms engage in collusion to:
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Earn Greater profits
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A monopolistically competitive firm has a
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highly elastic demand curve
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The larger the number of firms and the smaller the degree of product differentiation the:
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more elastic is the monopolistically competitive firm's demand curve.
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An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions is called:
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Oligopoly
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Under monopolistic competition entry to the industry is:
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more difficult than under pure competition but not nearly as difficult as under pure monopoly.
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In the long-run, economic theory predicts that a monopolistically competitive firm will:
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have excess production capacity.
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The economic inefficiencies of monopolistic competition may be offset by the fact that:
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consumers have a number of variations of the product from which to choose.
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The mutual interdependence that characterizes oligopoly arises because:
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a small number of firms produce a large proportion of industry output.
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