Reading 13: The Firm and Market Structures
collusion
We can design a similar two-firm oligopoly game where the equilibrium outcome is for both firms to cheat on a ___________________ agreement by charging a low price, even though the best overall outcome is for both to honor the agreement and charge a high price
natural monopoly
When the average cost of production for a single firm is falling throughout the relevant range of consumer demand, we say that the industry is a _________________________.
dominant firm
A final model of oligopoly behavior to consider is the _______________________ model. In this model, there is a single firm that has a significantly large market share because of its greater scale and lower cost structure—the dominant firm (DF). In such a model, the market price is essentially determined by the dominant firm, and the other competitive firms (CF) take this market price as given.
government
Because monopolists produce less than the optimal quantity (do not achieve efficient resource allocation), __________________________ regulation may be aimed at improving resource allocation by regulating the prices monopolies may charge. This may be done through average cost pricing or marginal cost pricing.
price discrimination
For ____________________ to work, the seller must: -Face a downward-sloping demand curve. -Have at least two identifiable groups of customers with different price elasticities of demand for the product. -Be able to prevent the customers paying the lower price from reselling the product to the customers paying the higher price An example would be different prices for airline tickets based on whether a saturday-night stay is involved (separated business travelers from leisure travelers)
monopolistic competition
In between perfect competition and a monopoly lies _______________________________ (many sellers and differentiated products) and oligopoly (few firms that compete in a variety of ways).
collusive
In general, ________________ agreements to increase price in an oligopoly market will be more successful (have less cheating) when: -There are fewer firms. -Products are more similar (less differentiated). -Cost structures are more similar. -Purchases are relatively small and frequent. -Retaliation by other firms for cheating is more certain and more severe. -There is less actual or potential competition from firms outside the cartel
price discrimination
if a monopoly's customers cannot resell the product to each other, the monopoly can maximize profits by charging different prices to different groups of customers, this is referred to as _______________________________________.
equals
in a perfectly competitive market, a firm will continue to expand production until marginal revenue (MR) ____________________ marginal cost (MC). Since in perfect competition, the firm is a price taker, marginal revenue is simply the price because all additional units are assumed to be sold at the same (market) price.
profits
in a perfectly competitive market, firms will not earn economic _____________ for any significant period of time. The assumption is that new firms (with average and marginal cost curves identical to those of existing firms) will enter the industry to earn economic profits, increasing market supply and eventually reducing market price so that it just equals firms' average total cost.
marginal cost
In markets characterized as monopolistic competition, oligopoly, and monopoly, there is no well-defined supply function. This is because under all three of these market structures, firms face downward-sloping demand curves. In each case, the quantity supplied is determined by the intersection of ________________ and marginal revenue, and the price charged is then determined by the demand curve the firm faces.
single-price
when price discrimination isn't possible, the monopoly will charge a ________________.
elastic
firms in monopolistic competition face downward-sloping demand curves (they are price searchers). Their demand curves are highly _______________ because competing products are perceived by consumers as close substitutes.
industry
five factors influencing where an _____________ falls along the market structure spectrum: 1. Number of firms and their relative sizes. 2. Degree to which firms differentiate their products. 3. Bargaining power of firms with respect to pricing. 4. Barriers to entry into or exit from the industry. 5. Degree to which firms compete on factors other than price.
kinked demand curve model
one traditional model of oligopoly, the __________________________________________, is based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will.
short-run
the ____________________ supply curve for a firm is its MC line about the average variable cost curve, AVC.
prisoner's dilemma
the _________________________ is an example of the nash equilibrium. The nash equilibrium in the game is for both prisoners to confess, and for each to get a sentence of two years even though by remaining silent each will receive a lesser 6 month sentence. The latter is not a nash equilibrium because either prisoner can improve his situation from silent/silent by confessing. No matter what the other prisoner chooses to do, the best sentence for a prisoner comes from confessing.
Herfindahl-Hirschman Index
the __________________________ (HHI) is calculated as the sum of the squares of the market shares of the largest firms in the market. This is a better way of calculating concentration ratios.
perfect competition
________________________ is a market structure in which many firms produce identical products, and competition forces them all to sell at the market price.
marginal cost pricing
________________________, which is also referred to as efficient regulation, forces the monopolist to reduce price to the point where the firm's MC curve intersects the market demand curve. This: 1. increases output and reduces price 2. causes the monopolist to incur a loss because price is below ATC Such a solution requires a government subsidy in order to provide a firm with a normal profit and prevent it from leaving the market entirely.
brand names
_________________________ provide information to consumers by providing them with signals about the quality of the branded product.
product innovation
___________________________ is a necessary activity as firms in monopolistic competition pursue economic profits. Firms that bring new and innovative products to the market are confronted with less-elastic demand curves, enabling them to increase price and earn economic profits. A firm is considered to be spending the optimal amount on innovation when the marginal cost of (additional) innovation just equals the marginal revenue (marginal benefit) of additional innovation.
perfect competition
___________________________ refers to a market in which: - many firms produce identical products - barriers to entry into the market are very low - firms compete for sales only on the basis of price - firms face perfectly elastic (horizontal) demand curves at the price determined in the market because no firm is large enough to affect the market price.
advertising expenses
____________________________ are high for firms in monopolistic competition. This is to inform consumers about the unique features of their products and to create or increase a perception of differences between products that are actually quite similar.
average cost pricing
_____________________________ is the most common form of regulation. It forces the monopolists to reduce price to where the firm's ATC intersects the market demand curve. This will: 1. increase output and decrease price 2. increase social welfare (allocative efficiency) 3. ensure the monopolist a normal profit because price = ATC
monopolistic competition
_______________________________ has the following market characteristics: 1. a large number of independent sellers 2. differentiated products 3. firms compete on price, quality, and marketing as a result of product differentiation 4. low barriers to entry
monopolistic competition
________________________________ differs from perfect competition in that products are not identical. - the demand curve faced by each firm is downward sloping - demand is elastic, but not perfectly elastic - prices are not identical because of perceived differences among competing products - barriers to entry are low an example would be the toothpaste market
monopoly
a ___________________ faces a downward sloping demand curve for its product, so profit maximization involves a trade-off between price and quantity sold if the firm sells at he same price to all buyers. Assuming a single selling price, this firm must lower its price in order to sell a greater quantity.
monopoly
a ____________________ is a market structure where only one firm is producing a particular product.
monopoly
a ____________________ market is characterized by a single seller of a product with no close substitutes. - the firm faces a downward-sloping demand curve and has the power to choose the price at which it sells its product - high barriers to entry protect against competition - can be furthered by copyrights and patents, control over a resource specifically needed as input to production, or by government
nash equilibrium
a __________________________ is a decision model based on strategic games concepts, and is reached when the choices of all firms are such that there is no other choice that makes any firm better off (increases profits or decreases losses).
natural monopoly
a __________________________ refers to a situation where the average cost of production is falling over the relevant range of consumer demand. In this case, having two or more producers would result in a significantly high cost of production that would be detrimental to customers.
permanent change
a ______________________________ in demand leads to the entry of firms to, or exit of firms from, and industry.
concentration measures
rather than estimate elasticity of demand, ______________________________________ for a market or industry are very often used as an indicator of market power when regulators analyze industries.
downsizing
the strategy of decreasing plant size to reduce economic losses is referred to as _________________________.
right
Another way of regulating a monopoly is for the government to sell the monopoly _______________ to the highest bidder. An example would be the right to build a gas station on a tollway.
markup, excess capacity
For firm output with monopolistic competition, price is greater than marginal cost (ie. producers can realize a _______________). Also, average total cost is not a minimum for the quantity produced (suggesting ______________________, or an inefficient scale of production), and the price is slightly higher than under perfect competition.
higher, lower
Monopolistic competition is likely to result in a _____________ price and ______________ quantity of output compared to perfect competition.
equals
The profit-maximizing output is the quantity at which marginal revenue (MR) ________________ marginal cost (MC). In a price-searcher industry structure (i.e., any structure that is not perfect competition), price is greater than marginal revenue.
above
The short-run supply function for a firm under perfect competition is its marginal cost curve _____________ its average variable cost curve, as described earlier
oligopoly
compared to monopolistic competition, an _______________________ market has higher barriers to entry and fewer firms. The other key difference is that the firms are interdependent, so a price change by one firm can be expected to be met by a price change by its competitors.
prisoner's dilemma
models of oligopoly pricing and profits must make the following assumptions: 1. Kinked demand curve model 2. Cournot duopoly model 3. Nash equilibrium model (_________________) 4. Stackelberg dominant firm model
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Just like the perfect competition model, the profit maximizing output for a monopolist is where MR = MC. To ensure a profit, the demand curve must lie above the firm's average total cost (ATC) curve at the optimal quantity so that price ____ ATC. The optimal quantity will be in the elastic range of the demand curve.
imperfect information
Monopolists are price searchers and have ______________________________________ regarding market demand. They must experiment with different prices to find the one that maximizes profit.
deadweight
Monopoly creates a _____________________ loss relative to perfect competition because monopolies produce a quantity that does not maximize the sum of consumer surplus and producer surplus. A further loss of efficiency results from rent seeking when producers spend time and resources to try to acquire or establish a monopoly
N-firm
One concentration measure is the ________________ concentration ratio, which is calculated as the sum or the percentage market shares of the largest N firms in a market. An issue with this ratio is that it may be relatively insensitive to mergers of two firms with large market shares.
Cournot Model
the ___________________________ considers an oligopoly with only two firms competing (ie a duopoly), and both have identical and constant marginal costs of production. Each firm knows the quantity supplied by the other firm in the previous period and assumes that is what it will supply in the next period. By subtracting this quantity from the (linear) market demand curve, the firm can construct a demand curve and marginal revenue curve for its own production and determine the profit maximizing quantity (given constant competitor sales). Firms determine their quantities simultaneously each period and these quantities will change each period until they are equal. When each firm selects the same quantity, there is no longer any additional profit to be gained by changing quantity, and we have a stable equilibrium.
market structure
the four types of _____________________ include: 1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly
equilibrium output
the long-run _____________________ level for perfectly competitive firms is where MR = MC = ATC, which is where ATC is at a minimum. At this output, economic profit is zero and only a normal return is realized.
oligopoly
the most important characteristic of an _________________ market is that there are only a few firms competing. - each firm must consider the actions and responses of other firms in setting price and business strategy (interdependent firms) - products are typically good substitutes, but may be quite similar or differentiated - barriers to entry are high - demand can be more or less elastic than for firms in monopolistic competition an example would be the automobile industry
right
the short-run market supply curve is the horizontal sum (add up the quantities from all firms at each price) of the MC curves for all firms in given industry. Because firms will supply more units at higher prices, the short-run market supply curve slopes upward to the __________.