Chapter 11-1 to 11-2

The lesson of the Prisoner's Dilemma game for the United States in its relations which China (or any other rival state) is which of the following?

"You do what is best for you, I'll do what is best for me, and somehow we end up in a situation that is not best for either of us."

Suppose total industry sales for a given year are $5 million and the four largest firms in the industry account for $4.5 million in sales. The four-firm concentration ratio is 0.90, or 90 percent

$5‍million×0.90=$4.5‍million

monopoly

- one seller - unique product - high barriers to entry - P>ATC (positive economic profits)

Oligopoly

-Few sellers -Homogeneous or differentiated product -barriers to entry P > ATC (positive economic profits)*,*

Oligopoly Assumptions

-Few sellers and many buyers -Firms produce and sell either homogenous or differentiated products - ex: aluminum, cars -Significant barriers to entry ex: economies of scale, patent rights, exclusive control of an essential resource, and legal obstacles also act as barriers to entry.

Assumptions of Monopolistic Competition

-Many buyers/sellers -Each firm produces and sells a slightly differentiated product with some differences due to brand names, packaging, etc. Ex: aspirin Bayer vs generic bands -Easy entry/ exit

perfectly competitive firms

-many sellers -homogenous products -no barriers to entry -long run market tendency P=ATC (zero economic profits)

Monopolistic Competition Characteristics

-many sellers -slightly differentiated products -no barriers to entry -long term market tendency P=ATC

Game Theory Assumptions

-try to reach an optimal position through game playing or the use of strategic behavior, -are fully aware of the interactive nature of the process at hand, and -anticipate the moves of other decision makers.

For the monopolistic competitor, P

> MR. -Because the monopolistic competitor produces the quantity of output at which MR=MC, it must produce a level of output at which price is greater than marginal cost (P > MC), as is obvious in Exhibit 1.

Game Theory

A mathematical technique used to analyze the behavior of decision makers who - try to reach an optimal position through game playing or the use of strategic behavior, - are fully aware of the interactive nature of the process at hand, and - anticipate the moves of other decision makers.

Prisoner's Dilemma

A situation in which two (or more) actors cannot agree to cooperate for fear that the other will find its interest best served by reneging on an agreement.

Cartel Theory

A theory of oligopoly in which oligopolistic firms act as if there were only one firm in the industry.

In the long run, firms in a monopolistically competitive industry will A. most likely earn zero economic profit. B. definitely earn zero economic profit. C. always earn an economic profit. D. always earn an accounting profit.

A. Because of easy entry into a monopolistically competitive market, any economic profits will likely be eliminated as firms enter the market and prices fall in the long run. Similarly, easy exit from the market will likely be eliminated as firms exit the market and prices rise in the long run. However, since monopolistic competitive firms produce a product with close substitutes, it may be able to differentiate its product sufficiently so that it does not have to lower its price as new firms enter the market.

Firms trying to form a cartel (enter into a cartel agreement) are likely to be in a prisoner's dilemma setting because one aspect of a prisoner's dilemma setting is that ____________. A. each cartel member can make itself better off at the expense of others by breaking the cartel agreement B. no member of the cartel can make itself better off at the expense of others by breaking the cartel agreement C. each cartel member is productive efficient D. each cartel member is resource allocative efficient

A. each cartel member can make itself better off at the expense of others by breaking the cartel agreement

Suppose an industry is made up of twenty firms, all with equal sales. The four-firm concentration ratio of that industry is _____. A. 10% B. 20% C. 30% D. 40%

B. The four-firm concentration ratio (CR4) of that industry is equal to the percentage of industry sales accounted for by the four largest firms. Each firm in an industry that is made up of twenty firms with equal sales would account for 5 percent of industry sales, thus CR4 = 5% + 5% + 5% + 5% = 20%.

Cartel

An organization of firms that reduces output and increases price in an effort to increase joint profits.

The excess capacity theorem is associated with _____ and states that the firm in equilibrium will produce a level of output that is _____ than the level of output that minimizes its average total cost. A. perfect competition; smaller B. monopolistic competition; smaller C. monopolistic competition; larger D. perfect competition; larger

B. monopolistic competition; smaller

Two individuals, charged with jointly committing a crime, would be best off in a prisoner's dilemma setting if _______. A. both confess B. neither confess C. one confesses and the other one does not D. one confesses, regardless of what the other one does

B. neither confess

The key behavioral assumption of the cartel theory is that oligopolists in a cartel act as if ___________. A. there were many firms in the industry B. there were only one firm in the industry C. all firms in the industry are price takers D. all firms in the industry are the same size

B. there were only one firm in the industry

In which market structure is there a few sellers and many buyers? A. Perfect competition B. Monopolistic competition C. Oligopoly D. Monopoly

C. Oligopoly

A market is _____ if entry and exit are costless, new firms can produce the product at the same cost as current firms, and exiting firms can easily dispose of their fixed assets by selling them. A. oligopolistic B. monopolistic C. contestable D. monopolistically competitive

C. contestable

The major economic objective of cartels is to __________. A. develop new research methods B. reduce costs C. reduce output, push up price, and increase profits D. experiment at finding new ways of producing high-quality products

C. reduce output, push up price, and increase profits

A low concentration ratio implies that more than

a few sellers make up the industry

A(n) _____ is an organization of firms that reduces output and increases price in an effort to increase joint profits. A. monopolistically competitive firm B. oligopoly C. excess capacity firm D. cartel

D. Cartel

In which market structure(s) can firms produce and sell either homogeneous or differentiated products? A. Perfect competition and monopolistic competition B. Monopoly and oligopoly C. Monopolistic competition D. Oligopoly

D. Oligopoly

Which of the following statements is false? A. The monopolistic competitor and the perfectly competitive firm are both resource-allocative efficient. B. The monopolistic competitor and the perfectly competitive firm are both productive efficient. C. The monopolistic competitor produces a quantity of output at which price is greater than marginal cost. D. a and b

D. a and b

Why do monopolistic competitors operate at excess capacity?

Essentially, they face downward-sloping demand curves. Because the demand curve is downward sloping, it cannot be tangent to the lowest point on a U-shaped ATC curve.

The monopolistically competitive firm is the same as both the perfectly competitive firm and the monopoly firm in one regard:

It produces the quantity of output at which MR=MC. -In Exhibit 1, the firm produces q1. -For this quantity, the monopolistic competitor charges the highest price it can charge: P1 in the exhibit.

all firms seek to produce MR=

MC

Because the monopolistic competitor produces output at which MR=

MC, it must produce a level of output at which price is greater than marginal cost (P > MC), as is obvious in Exhibit 1.

Are monopolistically competitive firms efficient?

No; not allocatively efficient because P≠MC and not productively efficient because it isn't producing at minimum ATC

Oligopoly- Long Run Profits

P > ATC (positive economic profits)

As an example, let's calculate a four-firm concentration ratio for industry Z. Suppose total industry sales for a given year are $5 million and the four largest firms in the industry account for $4.5 million in sales.

The four-firm concentration ratio is 0.90, or 90 percent ‍‍ ($5‍million×0.90=$4.5‍million). - Industries with high four- and eight-firm concentration ratios in recent years are cigarettes, cars, tires, cereal breakfast foods, farm machinery, and soap and other detergents, to name a few.

Suppose your letter grade in class depends on how well you do relative to others.

You and your fellow students are in a prisoner's dilemma.

Oligoly firms enter into

a cartel agreement. −This creates a prisoner's dilemma •The only way out is to have some entity enforce the cartel agreement. −To have firms not cheat

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Excess Capacity Theorem

a monopolistic competitor in equilibrium produces an output smaller than the one that would minimize its costs of production

Because of easy entry into the industry, there are likely to be

zero economic profits in the long run for a monopolistic competitor. In other words, P=ATC.

monopolistic competition faces a

downward sloping demand curve because if sells a slightly differentiated product and has some control over the price of its good.

A high concentration ratio implies that

few sellers make up the industry

Contestable market is called

hit-and-run entry and exit. −New entrants can enter (hit) and produce the product −Take profits from current firms −Then exit costlessly (run)

For a monopolistic competitor, the firms demand curve

is not the same as it MR curve

concentration ratio

is the percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by number x of firms in the industry

Because a monopolistic competitor faces a downward-sloping demand curve

it has to lower its price to sell an additional unit of the good it produces. It is a price searcher.

downward-sloping demand curve

price searcher

horizontal demand curve

price taker

Oligopolist is a price ________

searcher. , it produces the quantity of output at which MR = MC

long run monopolistic competition

the absence of entry barriers ensures that there are no profits P > ATC (zero economic profits)

The benefits of cheating on the cartel agreement

to increase their profits. After the cartel is formed, however, each firm has an incentive to break the cartel to increase its profits even further. (See Exhibit 5.) If there is no cartel agreement, the firm is earning zero profits by producing quantity q1. After the cartel is formed, it earns CPCAB in profits by producing quantity qC. But it can earn even higher profits (FPCDE) by cheating on the cartel and producing quantity qCC

contestable market

−Entry is easy and exit is costless −New firms can produce the product at the same cost as current firms −Existing firms can easily dispose of their fixed assets by selling them

Problems with cartel

−Forming the cartel −Formulating cartel policy −Entry into the industry −Cheating

Game theory questions

−Who tries to reach an optimal position for themselves through game playing or the use of strategic behavior? −Who are fully aware of the interactive nature of the process at hand? −Who anticipates the moves of other decision makers?