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