Chapter 12, Monopolistic Competition and Oligopoly

Five defining characteristics of oligopolistic markets

1. A few large producers. 2. A standardized or differentiated product 3. Significant barriers to entry 4. Producers are price makers 5. Producers are mutually interdependent

Oligopoly

A market structure characterized by a few large producers, of either standardized or differentiated products, operating in industries with extensive entry barriers. These producers are price makers and behave strategically when making decisions related to the features, prices, and advertising of their products.

Monopolistic competition

A market structure characterized by a relatively large number of sellers producing a differentiated product, for which they have some control over the price they charge, in market with relatively easy market entry and exit.

Dominant strategy

A situation in which a particular strategy yields the highest payoff regardless of the other player's strategy

Collusion

A situation in which individuals, firms or any group of actors coordinate their actions to achieve the desired outcome. Collusion is generally used to achieve an outcome that would not be possible in the absence of coordinated actions, and it is typically associated with illegal or anticompetitive behaviors.

Mutual interdependence

A situation in which the strategy followed by one producer will likely affect the profits and behavior of another producer.

Payoff matrix

A table showing the potential outcomes arising from the choices made by decision makers.

Nash equilibrium

An outcome in which, unless the players can collude, neither player has an incentive to change his or her strategy

Productive efficiency

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

Allocative efficiency

Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.

Normal profit

The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.

Economic profit

The level of profit that occurs when total revenue is greater than total cost.

Loss

The level of profit that occurs when total revenue is less than total cost.

Product differentiation

The strategy of distinguishing one firm's product from the competing products of other firms.

Game theory

The study of the strategic behavior of decision makers.

Excess capacity

The underutilization of resources that occurs when the quantity of output a firm chooses to produce is less than the quantity that minimizes average total cost

Deadweight loss

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium