Monopoly, Oligopoly, and Monopolistic Competition

Cartel

A cartel is a formal agreement among competing firms. It is a formal organization where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.

Natural monopoly

A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm. In some cases, this gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors.

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms.

Effectiveness

Effectiveness is the capability of producing a desired result. When something is deemed effective, it means it has an intended or expected outcome, or produces a deep, vivid impression. Etymology The origin of the word 'effective' stems from the Latin word effectivus, which means creative, productive or effective.

Free entry

Free entry is a term used by economists to describe a condition in which firms can freely enter the market for an economic good by establishing production and beginning to sell the product. Free entry is implied by the perfect competition condition that there is an unlimited number of buyers and sellers in a market. In comparison to perfect competition, however, free entry is a condition often more applicable to real world conditions.

Game theory

Game theory is the study of strategic decision making. More formally, it is 'the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.' An alternative term suggested 'as a more descriptive name for the discipline' is interactive decision theory. Game theory is mainly used in economics, political science, and psychology, as well as logic and biology.

Decision rule

In decision theory, a decision rule is a function which maps an observation to an appropriate action. Decision rules play an important role in the theory of statistics and economics, and are closely related to the concept of a strategy in game theory. In order to evaluate the usefulness of a decision rule, it is necessary to have a loss function detailing the outcome of each action under different states.

Imperfect competition

In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied. It is a market structure that does not meet the conditions of perfect competition. Forms of imperfect competition include:•Monopoly, in which there is only one seller of a good.•Oligopoly, in which there are few sellers of a good.•Monopolistic competition, in which there are many sellers producing highly differentiated goods.•Monopsony, in which there is only one buyer of a good.•Oligopsony, in which there are few buyers of a good.•Information asymmetry when one competitor has the advantage of more or better information. There may also be imperfect competition due to a time lag in a market.

Perfect competition

In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept.

Marginal cost

In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. If the good being produced is infinitely divisible, so the size of a marginal cost will change with volume, as a non-linear and non-proportional cost function includes the following: •variable terms dependent to volume, •constant terms independent to volume and occurring with the respective lot size, •jump fix cost increase or decrease dependent to steps of volume increase. In practice the above definition of marginal cost as the change in total cost as a result of an increase in output of one unit is inconsistent with the calculation of marginal cost as MC=dTC/dQ for virtually all non-linear functions.

Product differentiation

In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings. The concept was proposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition.

Deadweight loss

In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product. Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), externalities, taxes or subsidies, and binding price ceilings or floors.

Total cost

In economics, and cost accounting, total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs. The rate at which total cost changes as the amount produced changes is called marginal cost.

Fixed cost

In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced).

Market power

In economics, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors.

Profit maximization

In economics, profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue-total cost perspective relies on the fact that profit equals revenue minus cost and focuses on minimizing this difference, and the marginal revenue-marginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

Demand curve

In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together.

Absolute advantage

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party.

Economies of scale

In microeconomics, economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer's average cost per unit to fall as the scale of output is increased. 'Economies of scale' is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.

Marginal revenue

In microeconomics, marginal revenue is the additional revenue that will be generated by increasing product sales by 1 unit. It can also be described as the Unit Revenue the last item sold has generated for the firm. In a perfectly competitive market, the additional revenue generated by selling an additional unit of a good is equal to price the firm is able to charge the buyer of the good.

Monopolistic competition

Monopolistic competition is a type of imperfect competition such that one or two producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit.

Opportunity cost

Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the cost of the forgone products after making a choice.

Price discrimination

Price discrimination are transacted at different prices from the same provider. In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a feature of monopolistic and oligopolistic markets, where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount.

Price setting

Price setting refers to situations where a firm or a group of firms has the power to set prices in a market rather than taking the prevailing market price as given. While a firm in a competitive market can choose its price, it will always take the prevailing market price as given when maximizing its profits either because it believes its output to be of negligible quantity relative to the market quantity as a whole or because of the intense nature of market competition. A Price setting firm on the other hand believes that its choice will have an overall effect on the whole market and takes this feedback mechanism into consideration when deciding on its price and output.

Public policy

Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs. In general, the foundation is the pertinent national and substantial constitutional law and implementing legislation such as the US Federal code. Further substrates include both judicial interpretations and regulations which are generally authorized by legislation.

Software industry

The software industry includes businesses for development, maintenance and publication of software that are using any business model. The industry also includes software services, such as training, documentation, and consulting. History The word 'software' had been coined as a prank by at least 1953, but did not appear in print until the 1960s.

Inefficiency

The term inefficiency has several meanings depending on the context in which its used: •Allocative inefficiency - Allocative inefficiency theory says that the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits). For example, a company may have the lowest costs in 'productive' terms, but the result may be inefficient in allocative terms because the 'true' or social cost exceeds the price that consumers are willing to pay for an extra unit of the product. This is true, for example, if the firm produces pollution .

Total revenue

Total revenue is the total receipts of a firm from the sale of any given quantity of a product. It can be calculated as the selling price of the firm's product times the quantity sold, i.e. total revenue = price × quantity, or letting TR be the total revenue function: where Q is the quantity of output sold, and P(Q) is the inverse demand function (the demand function solved out for price in terms of quantity demanded).

Variable cost

Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs.