micro chap 12 & 13

pure monopoly

exists when a single firm is the sole producer of a product for which there are no close substitutes; main characteristics: single seller (sole producer), no close substitutes, price maker (pure monopolist controls Qs and thus has considerable control over price), blocked entry (pure monopolist has no immediate competitors bc certain barriers keep potential competitors from entering the industry), nonprice competition (product produced may be either standardized or differentiated)

four-firm concentration ratio

expressed as a percentage, is the ratio of the output (sales) of the four largest firms in an industry relative to total industry sales; 4-firm concentration ratio = output of 4 largest firms/total output in the industry

price war

in some instances when the macroeconomy is unstable, price reductions will set off a price war: successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares

product differentiation

monopolistic comp is distinguished by this; monopolistically competitive firms turn out variations of a particular product. they produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities, real or imagined, for their products

simultaneous consumption

A product's ability to satisfy a large number of consumers at the same time

cartel

most comprehensive form of collusion; a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge. output must be controlled-- the market must be divided up-- in order to maintain the agreed upon price

nonprice competition

the goal of product differentiation and advertising -- nonprice competition -- is to make price less of a factor in consumer purchases and make product differences a greater factor; if successful, the firm's demand curve will shift to the right and become elastic

price discrimination

the practice of selling a specific product at more than one price when the price differences are not justified by cost differences; can take 3 forms: 1. charging each customer in a single market the max price she/he is willing to pay, 2. charging each customer one price for the first set of units purchased and a lower price for subsequent units purchased, 3. charging some customers one price and other customers another price; price discrimination is possible when the following conditions are met: monopoly power, market segregation, no resale

socially optimal price

the regulated price Pr that achieves allocative efficiency; bc its determined by where the MC curve intersects the demand curve, this type of regulation is often summarized by the equation P=MC

game theory

the study of how people behave in strategic situations; classic ex: the prisoner's dilemma in which each of 2 prisoners confesses to a crime even tho they might go free if neither confesses

Herfindahl index

this index is the sum of the squared percentage market shares of all firms in the industry; Herfindahl index = (%S1)^2 + (%S2)^2 + (%S3)^2 +....+(%Sn)^2

differentiated oligopoly

when the firms in the oligopoly produce differentiated products. consumer goods industries like automobiles, tires, household appliances, breakfast cereals, cigs, etc. are differentiated oligopolies, which typically engage in considerable nonprice competition supported by heavy advertising

homogeneous oligopoly

when the firms in the oligopoly produce standardized (homogeneous) products; many industrial products (steel, zinc, copper, aluminum, lead, etc.) are virtually standardized products produced in oligopolies

nonrivalrous consumption

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

price leadership

entails a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings

kinked-demand curve

D2eD1; a demand curve that has a flatter slope above the current price than below the current price'; applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase

monopolistic competition

characterized by 1) a relatively large number of sellers, 2) differentiated products (often promoted by heavy advertising), 3) easy entry to, and exit from, the industry; involves: small market shares, no collusion, independent action

dilemma of regulation

comparing results of the socially optimal price (P=MC) and the fair-return price (P=ATC) suggests a policy dilemma/dilemma of regulation; when its price is set to achieve the most efficient allocation of resources (P=MC), the regulated monopoly is likely to suffer losses. survival of the firm would depend on permanent public subsidies out of tax revenues

interindustry competition

competition between two products associated w different industries

oligopoly

a market dominated by a few large producers of a homogeneous or differentiated product; oligopolists have considerable control over their prices, but each must consider possible reactions of rivals to its own pricing, output, and advertising decisions

mutual interdependence

a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry

rent-seeking behavior

any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's, or even society's, expense

X-inefficiency

occurs when a firm produces output at a higher cost than is necessary to produce it; reasons: managers may want to expand power, want an easier work life, avoid business risk, etc. or it could be bc a firm's workers are poorly motivated or ineffectively supervised

collusion

oligopolists often can benefit from this cooperation with rivals

excess capacity

plant and equipment that are underused bc firms are producing less than the min ATC output

network effects

present if the value of a product to each user, including existing users, increases as the total number of users rises

fair-return price

regulators set a regulated price that is high enough for monopolists to break even and continue in operation. this price is referred to as a fair-return price bc of a ruling in which the SC held that regulatory agencies must permit regulated utility owners to enjoy a "fair return" on their investments; fair return = normal profit

strategic behavior

self-interested behavior that takes into account the reactions of others

limit pricing

some oligopolists purposely keep prices below the short-run profit-maximizing level in order to bolster entry barriers; consumers and society may get some of the benefits of consumption -- prices closer to marginal cost and min ATC-- even w/out the comp that free entry would provide

import competition

the competition that domestic firms encounter from the products and services of foreign producers

barriers to entry

the factors that prohibit firms from entering an industry; in pure monopoly, strong barriers to entry effectively block all potential competition; weaker barriers may permit oligopoly, a market structure dominated by a few firms