ECON: Monopolistic Competition
Herfindahl Index
(S1%)^2 + (S2%)^2 + ... + (Sn%)^2
characteristics of oligopoly
-A few large firms -Differentiated or standardized products -Entry barriers -price makers -Mutual interdependace
Herfindahl-Hirschman Index (HHI)
a concentration index that measures the sum of the squared percentage of sales from all firms in a particular industry
four-firm concentration ratio (CR4)
a concentration ratio that measures the percentage of sales by the four largest firms in a particular industry
cartel
a group of competing 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. 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 anticompetitive behaviors
payoff matrix
a table showing the potential outcomes arsing from the choices made by decision makers
antitrust laws
laws designed to prevent firms from engaging in behaviors that would lessen competition in a market
four-firm concentration ratio
sales of four largest firms/total sales of industry x 100
sherman act (1890)
the first antitrust law enacted in the United States, which made "every contract, combination, or conspiracy in restraint of trade" illegal
market share
the percentage of total market sales accruing to one specific firm
game theory
the study of the strategic behavior of decision makers
excess capacity
the under utilization of resources that occurs when the quantity of output a firm chooses to produce is less than the quantity that minimizes average total cost
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
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
mutual interdependence
a situation in which a change in the strategy followed by one producer will likely affect the sales, profits, and behavior of another producer
dominant strategy
a situation in which a particular strategy yields the highest payoff regardless of the other player's strategy
federal trade commission act (1914)
an antitrust law enacted in the united states, which made "every contract, combination, or conspiracy in restraint of trade" illegal
clayton act (1914)
an 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
Nash Equilibrium
an outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy
product differentiation
the strategy of distinguishing one firm's product from the competing products of other firms
