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