m2 chpt 11

characteristics of monopolistic competition.

(c.) Relatively large number of sellers, (m) differentiated products (advertising: high costs/ gives you mkt. power) (c.) easy entry and exit

Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement ... aka the prisoners dilemma (think of confessing crime video from class)

(prisoners dilemma video from lecture) When deciding a price for their product, a firm's revenues will depend on the strategy it chooses and the strategy its rival chooses. If one firm chooses a high price and the other low, the low firm will make more. Assuming there is no collusion, both firms will choose the low price to sell their product at because they don't want to be undercut.

characteristics of an oligopolistic industry

Localized markets Interindustry competition World Trade dominant firms

Explain why a monopolistic competitor will realize only normal profit in LR

firms will enter a profitable industry & leave an unprofitable one. SO, firm will only break even

reasons for EXCESS CAPACITY in monopolistic competition. (plants and equipment that are underused b/c...)

firms will enter a profitable monopolistic competitor industry and leave an unprofitable one. SO, in LR, the firm will only break even

Differentiate between homogeneous and differentiated oligopolies.

homogeneous (standardized products) Ex. steel, zinc, aluminum differentiated products. Ex. automobiles, cereal, and cigarettes

Identify three possible models of oligopolistic price-output behavior.

kinked demand curve, collusion pricing, price leadership.

profit maximizing price & output level for monopolistic competitor in SR

produce at level of output where MR = MC

Explain how product differentiation occurs in similar products

product attributes, service, location, brand names and packaging, & some control over price

Identify and explain the most important causes of oligopoly.

• A few large producers • Homogeneous (standardized) or differentiated products • Control over price, but mutual interdependence (strategic behavior) • Entry barriers • Mergers

Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry.

•concentration ratio- percentage of 4 largest firms •herfindahl index- sum of the squared percentage market shares of all firms in the industry.