Chapter 10: Monopoly competition and oligarchy

What is the relationship between product differentiation and monopolistic competition?

a firm selling a differentiated product is essentially a monopolist for that product, and so is able to exercise some market power

game theory

a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make

prisoner's dilemma

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest

kinked demand curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

differentiated product

a product that is consumers perceive as distinctive in some way

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

more like competitors, because although their products are somewhat different, there are still plenty of substitutes for consumers to choose if prices get too high

Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?

no, because it charges a price higher than marginal cost

collusion

when firms act together to reduce output and keep prices high

imperfectly competitive firm

firms and organizations that fall between the extremes of monopoly and perfect competition

How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?

if the price it changes is above the average cost of production, the firm will experience profits. if the price is lower than average cost, the firm will experience losses

How does a monopolistic competitor choose its profit-maximizing quantity of output and price?

if the price it changes is above the average cost of production, the firm will experience profits. if the price is lower than average cost, the firm will experience losses

cartel

an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.

duopoly

an oligopoly with only two firms

product differentiation

any action that firms do to make consumers think their products are different from their competitors'

Does each individual in a prisoner's dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly

each individual benefits more from pursuing self interest, because the self interested option is better for him regardless of what the other participant does

How is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for a monopoly or a perfectly competitive firm?

it will be relatively elastic compared to that of the monopolist, since there are a large number of similar substitutes for the product, bus less elastic for that of the perfectly competitive firm, since products are differentiated

monopolistic competition

many firms competing to sell similar but differentiated products

What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?

there is an incentive for members of a cartel to cheat in order to gain more profits for the individual firm, so such arrangements tend to be unstable

If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?

they earn profits in the short run, and will continue doing so in the long run since entry cannot completely erase the differentiation in their product

oligopoly

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