Monopolistic Competition and Oligopoly

Which of the following tells us the profit per unit? -(π/Q) = P - ATC -Profit per Unit = Price - Average Total Cost -Profit per unit = Price + Average Total Cost -(π/Q) = P + ATC

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

When there is productive efficiency (select all that apply): -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 service -Output is produced in such a way that opportunity cost is zero -Output is produced in such a way that MB = MC

-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 service

Barriers present in oligopolistic markets:

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

Characteristics of Monopolistic competition:

-Relatively large # of competing sellers -Relatively easy entry and exit into the market -The ability to have some control over the prices consumers pay for products.

Indicate the two most common numerical indicators of market concentration: -The Herfindahl-Hirschman Index (HHI) -a block-pricing index -the market share -The four-firm concentration ratio (CR4)

-The Herfindahl-Hirschman Index (HHI) -The four-firm concentration ratio (CR4)

Oligopolistic markets are characterized by:

-a few large producers -can produce standardized or differentiated products -Producers who behave strategically when making decisions related to the features, prices and advertising of their products -Extensive entry barriers -Producers who are price makers

Determine how demand and elasticity of demand with change: -Number of other restaurants in the area increases: -Institutes a frequent-diner programs whereby a customer who visits 5x gets 6th meal free -Number of consumers in area increases

-decreases; increases - Increases; decrease -increase; not change

Demand curve for Monopolistic competition are:

-downward sloping -More elastic than monopolies -less elastic than prefectly competitive firms

Monopolistically competitive? Yes or No. 1) Satellite radio 2) AM or FM radio 3) Common Salt 4) Clothing 5) Shampoo

1) No 2)Yes 3) No 4) Yes 5) Yes

To determine if profit maximizing price and quantity generate profit or loss

1) Project qty up to the ATC and across to the price. If ATC is higher = loss, if ATC lower = profit

Determine whether the markets below can be reasonably described as oligopolistic: 1) Satellite television 2) Hotels 3) Tomatoes 4) Crude oil

1) Yes 2) No 3)No 4) Yes

Which measures a firm's profit? 1) MR - MC 2) TR-TC 3) (P-ATC) x Q 4) Profit per unit x Output

2) TR-TC 3) (P-ATC) x Q 4) Profit per unit x Output

The top four firms in the retail surfboard industry maintain total sales of $3 million per year. If the entire retail surfboard industry sells $12 million worth of output, then the four-firm concentration ratio is _______%.

25 ((3/12) * 100)

four-firm concentration ratio

A concentration ratio that measures the percentage of sales by the four largest firms in a particular industry.

Cartel

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

Collusion

A situation in which decision makers coordinate their actions to achieve a desired outcome. 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.

Payoff matrix

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

Nash Equilibrium

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

Federal Trade Commission Act (1914)

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

To determine whether a monopolistically competitive firms is generating an economic profit:

If ATC curve intersects with the demand curve = economic profit

four-firm concentration ratio (CR4)

Measures the % of sales by the 4 largest firms in an industry

Herfindahl-Hirschman Index (HHI)

Measures the sum of the squared % of sales from all firms in an industry

What is the most common form of market structure?

Monopolistic competition

Market Share

Percentage of total market sales accruing to one specific firm.

allocative efficiency

Producing goods that are most wanted by consumers in such a way that MB = MC *point where D and MC curves cross

Clayton Act (1914)

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

Sherman Act (1890)

The first antitrust act enacted in the U.S. , which made "every contract, combination, or conspiracy in restraint of trade" illegal

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

a Nash equilibrium

Prisoner's Dilemma

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

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

game

Short-run losses create incentives for firms to exit, which ___________(increases, reduces) market shares, prices and eliminates losses.

increases

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

interdependence

monopolistic competition

involves many firms producing slightly different products; easy entry/exit into market

Anti trust laws

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

For __________________ (monopolistically/perfectly) competitive firms, branding is important because many consumers do not like taking risks.

monopolistically

One common feature of __________competitive markets is that firms invest heavily in product development and innovation, which benefits __________greatly.

monopolistically; consumers

Through advertising and branding, ______________________ competitive firms increase the demand for their products and make those demands relatively ____________ inelastic, allowing them to charge ___________ prices and generate larger economic profits

monopolistically; more; higher

The long-run equilibrium for a monopolistically competitive firms occurs

normal profit

Producers operating in oligopolistic markets generate:

normal profits and even losses in the short-run

Monopolistic competition and a monopoly are

not the same market structure

The behavior followed by _________________firms needs to be strategic, given that they face other competitors in the market

oligopolistic

The demand curve for a perfectly competitive firm is

perfectly elastic and horizontal

To maximize profits (Qty)

point where MR intersects MC.

Productive efficiency

producing output at lowest possible ATC by using the fewest resources possible

(π/Q) = P - ATC tells us _________ per unit (one word)

profit

Short-run economic profit provides incentives for other firms to enter monopolistically competitve markets. This ____________(increases, reduces) market shares and prices and eliminates economic profits.

reduces

The incentives created by monopolistic competition:

result in a broad selection of similar, but differentiated, products that allow consumers to tailor their purchases to maximize their own utility

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

Game theory

the study of the strategic behavior of game 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

Collusion

A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition.

Games can have more than one Nash equilibrium (True or False)

True

If the products characteristics are so close to each other that consumers can't tell the difference between them, the market becomes

a perfectly competitive market

Product differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

dominant strategy

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

Anti trust laws are

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

A clear benefit to monopolistic competition for consumers is product ________

differentiation

To find profit-maximizing price

find point where MR intersects MC and project that quantity up the demand curve to the ATC and across to the corresponding price on the vertical axis.

Long-run equilibrium is

neither allocatively nor productively efficient