Monopolistic Competition and Oligopoly

Profit maximization implies that monopolistically competitive firms should expand production up to the point where the marginal revenue equals the marginal cost (true or false)

true

Profit per unit

(π / Q) = P - ATC Profit per Unit = Price - Average Total Cost (P - ATC) x Q = profit

Oligopoly

A market structure characterized by a few large producers, of either standardized or differentiated products, operating in industries with extensive entry barriers. These producers are price makers and behave strategically when making decisions related to the features, prices, and advertising of their products

Payoff matrix

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

Cartel

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

Mutual Interdependence

a situation in which the strategy followed by one producer will likely affect the profits and behavior of another producer

Collusion is generally used to

achieve an outcome that would not be possible in the absence of coordinated actions, and it is typically associated with illegal or anti-competitive behaviors

The long-run, normal-profit equilibrium is neither _______ nor _______

allocatively productively

For monopolistically competitive firms, _______ serves as a signal to consumers about the products they are going to purchase

branding

To maximize profits, a _______ should produce a level of output where marginal revenue equals the marginal cost

cartel

Monopolistically competitive markets _______ characteristics of competitive markets and pure monopolies

combine

In a monopolistic competitive market, _______ can usually find exactly what they are looking for based on their preferences and budgets

consumers

Prisoner's Dilemma

describes a situation in which the Nash equilibrium is not the outcome that maximizes the payoffs to both players

When profit exceeds zero, the firm is generating an _______

economic profit

In an oligopoly producers may or may not earn _______

economic profits

A number of _______ barriers are present in oligopolistic markets

entry

The mutual interdependence observed among oligopolistic firms is often studied using the tools of _______

game theory

Monopolistic competitive firms have an _______ to continuously improve and differentiate their products to have more control over their prices and to earn more economic profit

incentive

Dominant strategy

is a situation in which a particular strategy yields the highest payoff, regardless of the other player's strategy

Antitrust Laws

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

The _______ results in firms realizing normal profits, which removes all incentives for firms to enter or exit the industry

long-run equilibrium

The Sherman Act of 1890

made "every contract, combination, or conspiracy in restraint of trade" illegal

The Federal Trade Commission Act of 1914

made "unfair methods of competition" and "unfair or deceptive acts or practices" illegal

Profit equals total revenue _______ total cost

minus

Because _______ competitive firms face a _______ demand curve, their marginal revenue curve lies below the demand curve

monopolistically downward-sloping

Monopolistic competition and a monopoly are _______

not the same market structure

Monopolistically competitive firms are able to have some control over the _______ of their products

price

Productive efficiency

producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service

Allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost

A clear benefit to monopolistic competition for consumers is

product differentiation

Producers operating in oligopolistic markets can generate normal _______ and even _______ in the short run

profit losses

When a firm is producing at an output level where MR = MC, it is following the _______

profit-maximization rule

The Clayton Act

prohibits mergers that would substantially lessen competition or create a monopoly

Monopolistic competition and perfect competition have one main characteristic in common

relatively easy market entry and exit

Given that oligopolistic firms face other competitors in their markets, their behavior must definitely be

strategic

In a monopolistically competitive markets, which of the following allow consumers to be more responsive to price changes?

the availability of close substitutes

Normal profit

the level of profit that occurs when total revenue is equal to total cost. This level 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

Economic profit

the level of profit that occurs when total revenue is greater than total cost

Loss

the level of profit that occurs when total revenue is less than total cost

Product Differentiation

the strategy of distinguishing one firm's product from the competing products of other firms

Game theory

the study of the strategic behavior of decision makers

Excess capacity

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

Deadweight loss

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

Collusion

A situation in which individuals, firms, or any group of actors coordinate their actions to achieve a desired outcome

To calculate profit, three pieces of information must be identified

Average total cost Quantity of output Price

The characteristics of an oligopoly competitive market are

Either standardized or differentiated products Operation in industries with extensive entry barriers A few large producers Producers who behave strategically when making decisions related to the features, prices, and advertising of their products Producers who are price makers

4 characteristics of a perfectly competitive market

Large number of buyers and sellers Producers who are price takers Easy entry and exit Standardized product

The equilibrium output produced by an oligopolistic firm is

Not productively efficient Not allocatively efficient

Monopolistic Competition

a market structure characterized by a relatively large number of sellers producing a differentiated product, for which they have some control over the price they charge, in a market with relatively easy market entry and exit

Monopoly is a market structure characterized by

a market with barriers to entry a good or service for which there are no close substitutes a single seller the firm having significant price control

The monopolistically competitive firm produces less output than would be _______

allocatively efficient

a Nash equilibrium

an outcome in which, unless the players can collude, neither player has an incentive to change his or her strategy

A monopolistic competitive firm will produce output where marginal revenue _______ marginal cost.

equals

The firm will charge consumers whatever price they are _______ to pay for that level of output

willing and able

normal profit is also known as _______

zero economic profit

When there is productive efficiency

Output is produced at the lowest possible total cost per unit of production Output is produced using the fewest resources possible to produce a good or a service

A number of entry barriers are present in oligopolistic markets including

Significant costs of capital Economies of scale that may allow only a small number of firms to operate in a market Patents Pricing strategies Control of the resources needed to produce output

When profit equals zero, the firm is generating _______

normal profits