Econ Chapter 12

Duopoly

The Moral of the Story: A market that is a duopoly, that is, a two-firm oligopoly, may serve the public interest better than a monopoly because of the competition between the two duopolists.

Prisoner's Dilemma

The Moral of the Story: It is damaging to the public interest to permit rival firms to collude and to make joint decisions on what prices to charge for their similar products and what quality of product to supply.

Nash equilibrium

A Nash equilibrium results when each player adopts the strategy that gives the highest possible payoff if the rival sticks to the strategy it has chosen.

Cartel

A cartel is a group of sellers of a product who have joined together to control its production, sales, and price in the hope of obtaining the advantages of monopoly. worst form of market organization, in terms of efficiency and consumer welfare No Economies of Scale

Credible Threat

A credible threat is a threat that does not harm the threatener if it is carried out.

Dominant Strategy

A dominant strategy for one of the competitors in a game is a strategy that will yield a higher payoff than any of the other strategies that are possible, no matter what choice of strategy is made by competitors.

Perfectly Contestable

A market is perfectly contestable if entry and exit are costless and unimpeded.

Repeated Games

A repeated game is one that is played a number of times. give all of the players the opportunity to learn something about each other's behavior patterns and, perhaps, to arrive at mutually beneficial arrangements Tacit Collusion

Game Theory

A strategy represents a participant's operational plan A payoff matrix shows how much each of two competitors (players) can expect to earn, depending on the strategic choices each of them makes.

Zero-sum game

A zero-sum game is one in which exactly the amount one competitor gains must be lost by other competitors.

Oligopoly

An oligopoly is a market dominated by a few sellers, at least several of which are large enough relative to the total market to be able to influence the market price. Oligopolistic firms often seek to create unique products—unique, at least, in consumers' perception

Overview

As we will confirm in Chapter 14, the behavior of the perfectly competitive firm and industry theoretically leads to an efficient allocation of resources that maximizes the benefits to consumers, given the resources available to the economy. Monopoly, however, can misallocate resources by restricting output in an attempt to raise prices and profits. Under monopolistic competition, excess capacity and inefficiency are apt to result. And under oligopoly, almost anything can happen, so it is impossible to generalize about its vices or virtues. As will be discussed in Chapter 16, some analysts believe oligopolists have made a significant contribution to the economic growth of the past two centuries that has brought a spectacular increase in average incomes in the world's wealthier countries.

Overview

Consequently, AC = AR in long-run equilibrium under these two market forms. In equilibrium, MC = MR for the profit-maximizing firm under any market form. However, under oligopoly, firms may adopt the strategies described by game theory or they may pursue goals other than profits; for example, they may seek to maximize sales. Therefore, in the equilibrium of the oligopoly firm, MC may be unequal to MR.

Demand Curve

In contrast to a perfect competitor, a monopolistic competitor's demand curve is negatively sloped. Because each seller's product is different, each caters to a set of customers who vary in their loyalty to the particular product

Long Run Equilibrium

Long-run equilibrium under monopolistic competition requires that the firm's output be at a level where its demand curve and its average cost curve meet, and there the two curves must be tangent, not crossing.

Monopolistic Competition

Numerous participants—that is, many buyers and sellers, all of whom are small Freedom of exit and entry Perfect information Heterogeneous products—as far as the buyer is concerned, each seller's product differs at least somewhat from every other seller's product

Interdependent

Oligopolists recognize that the outcomes of their decisions depend on their rivals' responses

Kinked Demand Curve

One reason for such "sticky" prices may be that when an oligopolist cuts its prod-uct's price, it can never predict how rival companies will react if competitors match its price moves, and the other demand curve represents what will happen if competitors stubbornly stick to their initial price levels. the DD curve is the more elastic A kinked demand curve is a demand curve that changes its slope abruptly at some level of output

Overview

Perfect competition and pure monopoly are concepts useful primarily for analytical purposes—we find neither very often in reality. There are many monopolistically competitive firms, and oligopolistic firms account for the largest share of the economy's outp

Overview

Profits are zero in long-run equilibrium under perfect competition and monopolistic competition because entry is so easy that high profits attract new rivals into the market

maximin criterion

The maximin criterion requires a player to select the strategy that yields the maximum payoff on the assumption that the opponent will do as much damage as it can.

excess capacity theorem of monopolistic competition

Under monopolistic competition in the long run, the firm will tend to produce an output lower than that which minimizes its unit costs, and hence unit costs of the monopolistic competitor will be higher than necessary. Because the level of output that corresponds to minimum average cost is naturally considered to be the firm's optimal capacity, this result has been called the excess capacity theorem of monopolistic competition. Thus, monopolistic competition tends to lead firms to have unused or wasted capacity.

Ignoring Interdependence

Ways to study Oligopolies

Strategic Interaction

Ways to study Oligopolies For many oligopolies, then, competition may resemble military operations involving tactics, strategies, moves, and countermoves. Thus, we must consider models that deal explicitly with oligopolistic interdependence

Price Leadership and Tacit Collusion

Ways to study Oligopolies tacit collusion—where firms, without meeting together, try to do unto their competitors as they hope their competitors will do unto them price leadership Under price leadership, one firm sets the price for the industry and the others follow.

short-run equilibrium

a monopolistic competitor maximizes profits by producing the output at which marginal revenue equals marginal cost (MC)

Price War

price war In a price war, each competing firm is determined to sell at a price that is lower than the prices of its rivals, often regardless of whether that price covers the pertinent cost. Typically, in such a price war, Firm A cuts its price below Firm B's price; B retaliates by undercutting A; and so on until some of the competitor firms surrender and let themselves be undersold.

Sales Maximization

sales maximization A firm's objective is said to be sales maximization if it seeks to adopt prices and output quantities that make its total revenue (the money value of its sales), rather than its profits, as large as possible. MR is the additional revenue obtained by raising output by one unit. If the firm wishes to maximize total revenue, then whenever MR is positive, it will want to increase output further, and anytime that MR becomes negative, X's management will want to decrease output. Only when MR = 0 can management possibly have maximized total sales revenue.