chapter14

oligopolies arise because of

- economies of scale in production - the presence of barriers to entry in these industries - mergers

Reputation

- favorable reputation established oligopolists - in many oligopolies such as the market for breakfast cereals and soft drinks, firms have build and maintained brand loyalty through heavy advertising expenditure. This puts new entrants at a disadvantage. -this is surmountable barrier but it takes time and expenditure for new entrants to compete with established firms.

Advertising is one way existing firms can impose heavy costs to discourage entry into the industry. For​ example, suppose an existing firm spends ​300,000 on advertising costs and sells 50,000 units of output. Now assume a new entrant comes into the industry. The new entrant decides to match the existing firms advertising expenses but only sells 20,000 units of output.

-The per unit cost of advertising for the existing firm is 300,000/50,000=6 -But the cost for a new entrant would be ​$15 per unit of output (300,000/20,000) -since advertising enables existing fins to impost costs on new entrants, it is classified as a firm-created barrier to entry

An example of a​ government-imposed barrier to entry is

-a tariff on imports -a patent

Suppose the four largest steel producers in the U.S. among them control 85% of total market sales. We would say that this industry is -----. We say that the ---- is 85% in this industry.

-highly concentrated -concentration ratio

Actions of firms that are aimed at deterring entry include

-introducing new products to fill market niches. -setting lower prices to keep profits at a level that makes entry less attractive. -advertising to create product loyalty.

The theory of monopolistic competition helps explain industries with a --- number of --- firms. They theory of oligopoly helps explain industries with a ---- number of --- firms.

-large -small -small -large

cartel model

The oligopolistic model in which firms produce exactly the same results as would exist if a monopolist controlled the entire industry

Game theory

The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms.

economies of scale

help determine the extend of competition in an industry

What effect might suppliers have on an​ industry?

if an input is specialized, then the supplier is likely to have the bargaining power to limit a firm's profits

How is the​ prisoner's dilemma result changed in a repeated​ game?

in a repeated game, players can employ retaliation strategies.

A characteristic found only in oligopolies is

interdependence of firms.

Three examples of oligopolies in the United States are industries that produce or sell

computers​, athletic​ footware, and cigarettes.

a. Economists say that oligopolistic firms exhibit strategic behaviour. These firms are aware of and take account of the decisions of rivals b. The firms in an oligopoly have a collective incentive to cooperate in order to maximize joint profits​; ​individually, each firm has an incentive to compete in order to maximize individual profits . c. Oligopolistic firms exhibit profits in the long run only if there are significant barriers to entry .

d. Three examples of entry barriers that firms with market power can create are brand proliferation ​, heavy advertising​, and low pricing . e. An important defence of oligopoly is the idea that it leads to more innovation than would occur in either perfect competition or monopoly. The oligopolistic firm has an incentive to innovate because it can expect to keep a good share of the resulting profit.

A firm that has the ability to set prices faces a ---- demand curve.

downward-sloping

The most important barriers to entry are

economies of​ scale, ownership of a key​ input, and government imposed barriers.

patents

ex. only 4 medications have received government approval for the treatment of Alzheimer's disease

economist michael porter argues that if new firms threaten to enter, then

firm profits in the industry will be lower

the prisoner's dilemma

is a well-known game that demonstrates the difficulty of cooperative behavior.

Noncooperative​ equilibrium

A game outcome in which players pursue their own​ self-interest

Cooperative​ equilibrium

A game outcome in which players seek to increase their mutual payoff.

Nash​ equilibrium

A situation in which each firm chooses the best​ strategy, given the strategies chosen by other firms.

Dominant​ strategy

A strategy that is the best for a​ firm, no matter what strategies other firms use

the government would be willing to impose barriers to

A. encourage firms to carry out research and development of new and better products. B. protect the public from incompetent practitioners. C. protect U.S. firms from international competition.

a firm operation in a monopolistically competitive market structure maximize profits when MR=MC. A firm that is operating in an oligopolistic market structure maximizes profits when MR=MC although its rivals' responses to its actions will affect its marginal revenue.

MR=MC MR=MC marginal revenue

One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an​ oligopoly?

Most economists believe that a four-firm concentration ratio of greater than 40% indicates that an industry is an oligopoly.

characteristics of a Game - Rules -Strategies -Payoffs

Rules: that determine what actions are allowable Strategies : that players employ to attain their objectives in the game. Payoffs: that are the results of the interaction among the players' strategies

A concentrated industry is one that has

a relatively small number of firms that dominate a market.

An example of explicit collusion is

a situation where firms meet and agree to charge the same price​, and an example of implicit collusion is price leadership.

how might an existing firm deter entry of new firms

advertise to create product loyalty

Which of the following is an example of a way in which a firm in oligopoly can escape the​ prisoners' dilemma?

advertising that it will match its​ rival's price

What is an​ oligopoly?

an oligopoly is a market structure where a small number of interdependent firms compete.

An oligopoly firm is similar to a monopolistically competitive firm in that

both firms have market power.

The five competitive forces are

competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, the bargaining power of​ buyers, and the bargaining power of suppliers.

A firm could gain from cheating on a cartel agreement by doing all

lowering its price below the agreed level. selling more than its agreed quota. increasing production.

zoning regulations

may prohibit the building of another supermarket or a movie theater in a certain area thus preserving the oligopoly status of the few firms already established there.

it is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because

minimum average cost occurs when firm output is a large fraction of industry output

What do barriers to entry have to do with the extent of​ competition, or lack​ thereof, in an​ industry? Without barriers to​ entry,

new firms will enter industries where firms are earning economic profits.

What is the difference between explicit collusion and implicit​ collusion?

occurs when firms signal to each other without actually meeting and agreeing to charge the same price

strategic barriers

oligopolies often pursue strategies designed to Keep out potential competitors. ex. especial deal, best shelf about competition

Producing a homogeneous product occurs in which of the following​ industries?

oligopoly and perfect competition

legal (government imposed) barriers

patents, licensing, zoning regulations

Is the concentration ratio an accurate measure of the extent of​ competition?

the four-firm concentration ratio is flawed in that it does not measure competition between industries.

licensing

the government may grant license to only a handful of firms, say to import a product

Which of the following is important in determining the extent of competition in an​ industry?

the minimum efficient scale of production relative to market demand.

An oligopolist differs from a perfect competitor in that

there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

The government issues patents to firms

to encourage innovation and to give the firms time to develop a new product.

An​ oligopolist's demand curve is

unknown because a response of firms to price changes by rivals is uncertain.

Which of the following is an example of a way buyers might affect an​ industry?

wal-mart has a significant bargaining power it supplier, which lowers the prices suppliers can charge.

The​ prisoners' dilemma illustrates

why firms will not cooperate if they behave strategically.