monopolistic competition and oligopoly

Monopolistically competitive firms are neither

allocatively efficient nor productively efficient in the long run.

Federal trade commission act (1914)

antitrust law that made "unfair methods of competition" and "unfair or deceptive acts or practices" illegal -popular TV doctor promotes a drug that helps weight loss but there is no proof it works, this act prevents these acts

Clayton Act (1914)

antitrust law that prohibits mergers that would substantially lessen competition or create a monopoly, as well as some specific business practices such as price fixing and tying contracts -only 2 radio companies in existance propose to merge into one, creating a monnopoly, this act bans mergers id the effect is significant decreased competition

productive efficiency

producing out put at the lowest possible average total cost of production; using fewest resources to produce

graphs

pure monopoly- steep monopolistic competition- less steep perfect competition- horizontal

characteristics of monopolistic competition

- large # of producers in the market - differentiated product - sellers w some control over prices they charge - easy market entry/exit

four-firm concentration ratio (CR4)

-concentration ratio that that measures the percentage of sales by the 4 largest firms in a particular industry -(sales of 4 largest firms/total sales of industry)*100 - higher the number= more concentrated industry -between 0-100, 100%=pure monopoly

monopolistic competition

-downward sloping demand curves -the more similar the substitutes are, the more elastic the demand curves will be, so more horizontal -the more unique a demand curve is the more vertical it is -demand curves are more elastic than those faced by monopolies -demand curves are less elastic then those faced by competitive firms

oligopoly

-few large producers - standardized or differentiated products - extensive industry barriers -price makers - like in oil, producers may reduce output to keep prices and profits high -producers may compete in prices of products -firms must be strategic -CR4 is 40% or higher

satellite radio AM or FM radio common salt clothing shampoo

1. not monopolistically competitive 2. monopolistically competitive 3. not monopolistically competitive 4. monopolistically competitive 5. monopolistically competitive

ATC

AFC + AVC

Why is deadweight loss present in an oligopoly market?

Because oligopolies charge a higher price than would be charged under perfect competition.

2 most common numerical indicators of market concentration

HHI CR4

profit maximizing rule

MR=MC for quantity, for price go up to demand curve

profit

TR-TC (P-ATC)*Q Profit per unit*Output profit per unit*output profit>0 economic profit profit=0 normal profit profit<0 loss

normal profit

The level of profit that occurs when TR=TC -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 -zero economic profit MR(Price)=MC at ATC

dominant strategy

a situation in which a particular strategy yields the highest payoff for decision maker regardless of the other decision makers strategy

in a monopolistically competitive market what makes consumers more responsive to price changed

availability of close substitutes

monopolistically competitive market

combine characteristics of competitive markets and pure monopolies

Herfindahl-Hirschman Index (HHI)

concentration index that measures the sum of the squared percentage of sales from all firms in a particular industry -(S1%)^2+(S2%)^2+..... - higher the number= more concentrated industry -between 0-10,000, 10,000=pure monopoly

collusion

decision makers coordinate their actions to achieve a desired outcomes -used to achieve an outcome that would not possibly be in the absence of coordinated actions -illegal or anticompetitive behaviors

product differentiation

distinguishing one firms product from the competing product of other firms

Sherman Act (1890)

first antitrust act in US -"every contract, combination, or conspiracy in restraint of trade" illegal -CEOs of 2 major soft drink companies meet and agree to never discount their regular prices, this act bans fixing prices

a monopolistically competitive firm demand curve

flatter than that of a monopolist

cartels

group of competing companies that aim to maximize joint profits by coordinating their policies to fix prices, manipulate output, or restrict competition

a monopolistically competitive firm generates economic profit when

if the ATC intersects the demand curve -if the ATC is above demand curve, there is no economic profit

in an oligopoly, producers' agreements to restrict output tend to be unstable because each firm has an incentive to

produce more than its output quota

allocative efficiency

producing goods and services that are most wanted by consumers in a way that marginal benefit=marginal cost MB=MC MB= demand curve

monopolistic competition

large # of sellers producing differentiated product -have some control over the price they charge -easy entry/exit in market -downward sloping demand curves - not allocatively efficient - combine characteristics of competitive markets and pure monopolies

antitrust laws

laws designed to prevent firms from engaging in behaviors that would lessen competition in a market

Monopoly vs. Monopolistic Competition

monopoly- involves one firm, entry/exit is relatively blocked monopolistic competition- many firms producing slightly, easy entry/exit

Nash Equilibrium

outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy

market share

percentage of total market sales accruing to one specific firm

profit per unit

price-ATC (pi/Q)=P-ATC

mutual interdependence

situation where a change in strategy followed by one producer will likely affect the sales, profits, and behavior of another producer

game theory

study of strategic behavior of decision makers

payoff matrix

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

economic profit

the level of profit that occurs when total revenue is greater than total cost MR(price) exceeds ATC

loss

the level of profit that occurs when total revenue is less than total cost MR(price) is less than ATC

excess capacity

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

deadweight loss

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

allocatively efficient level of output is

where demand and marginal cost curve crosses