Unit 2 Part 2.5 Objectives: The Nature and Function of Product Markets (Modules 58-68)

What is the economics significance of advertising brand names?

Advertising brand names offers assurance of the quality of goods.

What are the legal constraints of anti-trust policy?

Anti- Trust policies make cartels and collusion illegal.

What are the causes and effects of price wars, product differentiation, price leadership, and non-price competition?

Causes: Large number of firms,and difference in interest are among the things that lead to price wars and price discrimination along with price leadership. Effects: Price Wars, and product differentiation lead to negative price effect for the firms and the consumers.

Why can oligopolists benefit from collusion?

Collusion leads to a price or an output level for a market that allows oligopolists to maximize industry profits.

How can your understanding of oligopoly be enhanced by using game theory?

In oligopolies, firms can create maximum profit by joining together. Game theory helps to see a visual of how both firms maximize their profit by colluding.

Why do oligopolists and monopolistic competitors differentiate their products?

In order to outdo their competition, they differentiate their products. This is to attract consumers.

Describe the concept of prisoners dilemma and provide an example in matrix form.

In prisoner's dilemma, each player has an incentive to cheat and take an action for their own benefit at the expense of the other. When both players cheat, bot hare worse off than if neither had cheated.

How are the prices and profits determined in monopolistic competition, both in the short run and the long run?

In the short run, the profit is found by finding the area under the curve of the area between the demand curve and the ATC curve and the quantity produced. In the long run, it is the same area under the curve.

What are the factors that limit tacit collusion?

Large numbers of firms in the industry, complex products and pricing schemes, differences in interests of firms, and bargaining powers of buyers.

How does monopolistic competition lead to inefficiency and excess capacity?

Monopolistic Competition is not efficient when P>Minimum ATC, and when P>MC. There is excess capacity because firms do not operate at minimum ATC.

What is the importance of an oligopoly in the real world?

Oligopolies are more common in the real world than monopolies. In the real world, industries such as oil, cars, and phones are all examples of the use of oligopolies.

How can repeated interactions among oligopolists result in collusion in the absence of any formal agreement?

Repeated interactions among oligopolists result in collusion without formal agreement in tacit collusion. This still leads to maximization of profit.

Why do Oligopolists have incentive to act in ways that reduce their combined profit?

The incentive to cheat motivates firms to produce more than the quantity that maximizes their joint profits rather than limiting output like a true monopolist would.