Ch 25 Monopolistic Competition and Oligopoly

Price war

A series of competitive price cuts that lowers the market price below the cost of production. An effort to gain market share.

Concentration ratio

The share of industry output in sales or employment accounted for by the top(often four or five) firms. An empirical measure of a market's competitive structure.

price leadership

A form of implicit collusion in which a leading firm in an oligopoly announces a price change followed by the other firms in the industry matching the change.

Cartel

A formal organization of producers that agree to coordinate prices and production, such as OPEC.

Oligopoly

A market in which control over the supply of a commodity is in the hands of a *small number* of producers. Each one can influence prices and affect it's competitors.

Monopolistic competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. Typically products are *differentiated* by advertising.

Game-theory model

A means of analyzing the pricing behavior of oligopolist. Two oligopolists can compete by matching prices or refusing to match prices, with different payoffs. They can also *collude* to protect profits.

Herfindahl Index

A method of obtaining a measure of market concentration. The sum of the squared market percentages of the top 50 firms. For Example HHI=50^2+25^2+15^2+10^2=3450. The maximum possible score would be 10,000 for a monopoly (100^2).

Collusion

An (usually) illegal agreement among oligopolies to fix prices for their benefit.

Mutual interdependence

An oligarchical firm cannot completely control price and profit, because the other firms in the oligarchy may react to the firm's pricing strategy. For example, an airline may raise prices, but its competitors may not follow suit forcing the airline to rescind the price increase.

Tacit understandings

Understood or verbal agreement on product price, allowing nonprice competition to determine market shares.

Homogeneous oligarchy

A firm that produces standard or undifferentiated products in competition with a few other firms.

Differentiated oligarchy

A firm that produces differentiated products in competition with a few other firms. Nonprice competition supported by advertising is usual.

Interindustry competition

Competition for sales between the products of one industry and the products of another industry.

Nonprice competition

Emphasizing factors other than price to distinguish a product from competing brands.

Excess capacity

In the short run, monopolistically competitive firms will focus on *economic* profits, but at a lower *output* than they could at a *normal* profit. The difference in output between the two outputs is excess capacity. In the long run, economic profits disappear (normal profit only) with no excess capacity.

Import competition

The competition that domestic firms encounter from the products and services from foreign industries.

Product differentiation

The creation of real or perceived product differences usually via branding and advertising.

Kinked-demand curve

The demand curve for a non-collusive oligopolist , which is based on the assumption that rivals will match a price decrease and will ignore a price increase.