Chapter Twelve: Monopolistic Competition and Oligopoly

Using game theory we can identify ...

-the likely outcomes i na market -explain why firms may choose to collude to generate higher economic profits -provide insights on why collusion often breaks down

Major difference between perfectly competitive, monopolistic, and monopolistically competitive markets?

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.

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.

dominant strategy

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

collusion

a situation in which individuals, firms, or any group of actors coordinate their actions to achieve a desired outcome. Collusion is generally use to achieve an outcome that would not be possible in the absence of coordinate actions, and it is typically associated with illegal or anticompetitive behaviors.

mutual interdependence

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

payoff matrix

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

Nash equilibrium

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

In economics, we use _____ to illustrate the mutually interdependence nature of oligopolistic firms

game theory

Monopolistically competitive markets is one in which there are a relatively _____ number of competing sellers able to have some control over the price they charge. Market entry and exit are relatively _____.

large easy

Produce output at the point at which marginal revenue equals _________.

marginal cost

Games can have ...

more than one Nash equilibrium

_____________ is a situation in which the strategy followed by one producer will likely affect the profits and behaviors of another producer

mutual interdependence

The long-run equilibrium for a monopolistically competitive firm occurs at a level of output that generates ______.

normal profits

Monopolistically competitive markets combine characteristics from ...

perfectly competitive and monopolistic markets

A _____ dilemma is a term used to describe a situation in which Nash's equilibrium is not the outcome that maximizes the payoff to both players

prisoner's

Because monopolistic competitive firms offer products that are close substitutes to each other, their consumers are more ________ to price changes. As a result, demand is ______ than that faced by pure monopolies.

responsive relative more elastic

Oligopolistic markets are characterized by a few large producer, mainly because of the presence of ...

significant entry barriers

game theory helps us study the _____ behavior of oligopolistic firms

strategic

product differentiation

the strategy of distinguishing one firm's product from the competing product of other firms

The presence of _______ economic profit provides incentives for other firms to enter the market, reducing market shares and prices and ultimately eliminating those economic profits.

short-run

___________ is not an entry barrier in oligopoly markets

start-up costs

game theory

the study of the strategic behavior of decision makers

excess capacity

the underutilization of resources that occurs when the quantity o output a firm chooses to produce is less than the quantity that minimizes average total cost

a clear benefit to monopolistic competition for consumers is product _____

variety