Chapter 10: Monopolistic Competition and Oligopoly

Monopolistic Competition

Many firms competing to sell similar but differentiated products.

Oligopolist firm's problem

"How can I max my profit by changing the quantity I produce, given my production options, as well as the price, given there are X other firms out there doing/thinking similarly?"

Game Theory

A branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make.

Prisoner's Dilemma and "the coordination problem"

A game in which the gains from cooperation are larger than the rewards from pursuing self-interest. If everyone worked together, they would end up getting the best result and higher profit. But everyone ends up pursuing their self-interest where both parties end up with the worst option.

Cartel

A group of firms that collude to produce the monopoly output and sell at the monopoly price

Allocative efficiency and Productive efficiency for monopolistic competition

A monopolistically competitive industry does not display productive and allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

Kinked Demand Curve

A perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases. How the other oligopolists react to changes in the firm's price (by cutting whenever someone cuts prices) makes it so very little increase in is quantity sold.

Differentiated Product

A product that is perceived by consumers as distinctive in some way (within categories like physical, location, intangible, perception).

Reasons Oligopolies exist

Differentiation, barriers to entry, scope of demand vs returns to scale are all examples.

Monopolistically competitive firm's problem and solution

Same as monopolists: "How can I max profit by changing quantity and price given production options as well as the market demand curve"? Solves same way too, by finding the quantity of output that achieves the greatest difference of total revenue over total cost (this is profit maximization).

Best Response

The best option where both parties act in the interest of the whole, instead of themselves, to get the best result/profit.

Perceived Demand

The firm's perceived demand curve is downward sloping, like a monopolists'.

Short vs. Long run in Monopolistic Competition

Though, at first, firms could get positive profit in the short run; more competition can enter the market, which will make the positive profits change to normal profits in the long‐run. Just like a perfectly competitive firm.

Oligopoly

When a few large firms have all or most of the sales in an industry.

Collusion

When firms act together to reduce output and keep prices high (pretty illegal most places).