Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition

characteristics of perfect competition

- all firms are price takers - all firms sell an equal product - large number of buyers and sellers - no barriers to entry - perfect information

characteristics of monopolistic competition

- relatively large number of sellers - differentiated products - easy entry and exit from the industry - advertising and nonprice competition

characteristics of a monopoly

- single seller - unique good with no substitutes - firm can manipulate the cost/ability to manipulate cost

characteristics of an oligopoly

- small number of firms - barriers to entry - industry concentration

cartel

a group of producers that agree to restrict output in order to increase prices and their joint profits.

monopolistic competition

a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and out of the industry in the long run.

monopoly

an industry controlled by a firm that is the only producer of a good that has no close substitutes.

oligopoly

an industry with few sellers and when the outcome for each seller depends on the behavior of the others.

duopoly

an oligopoly consisting of only two firms

what are the barriers to entry for a monopoly?

barriers to entry are blockages put in place that are designed to block potential entrants from entering a market profitably. barriers to entry can take the form of control of a natural resource or input, increasing returns to scale that give rise to a natural monopoly, technological superiority, or government rules that prevent entry by other firms, such as patents or copyrights.

natural monopoly

exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

what is the role of advertising in product differentiation?

firms will engage in advertising to increase demand for their products and enhance their market power. advertising brand names that provide useful information to customers are valuable to society, but can also be wasteful from a societal standpoint when their only purpose is to create market power.

perfect competition

involves a very large number of firms producing a standardized product, when firms are price-takers

what makes it hard for companies to collude on prices?

it's hard for companies to collude on prices because it's illegal and cannot be formalized, so it would be difficult to trust a company to hold to an agreement or engage in noncooperative behavior, where one or both firms act in their own self interest.

brand names

names owned by particular companies that differentiate their products in the minds of consumers.

what are the ways that the government tries to shut down monopolies?

policy toward monopolies depends crucially on whether or not the industry in question is a natural monopoly. if the industry is not a natural monopoly, the best policy is to prevent a monopoly from arising or break it up if it already exists. public policy can regulate (price regulation) or instead of allowing a private monopolist to control an industry, the government can establish a public agency to provide the good and protect consumer interest.

market power

refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare

strategic behavior

taking into account the effects of its (a smart oligopolist) action on the future actions of other players.

payoff

the firm's profit (any situation in which the reward to any one player depends not only on his or her actions but also on those on other players in the game.) the reward received by a player in a game, such as the profit earned by an oligopolist.

explain the prisoner's' dilemma theory.

the prisoner's dilemma theory implies the following: each player has an incentive, regardless of what the other player does, to cheat; to take an action that benefits it at the other's expense, and when both players cheat, both are worse off than they would if neither had cheated.

what are the three forms of product differentiation?

the three forms of product differentiation are style or type, location, and quality.

what is the strategy of tit for tat?

tit for tat is a form of strategic behavior because it is intended to influence the future actions of other players. the tit-for-tat strategy offers a reward to the other player for cooperative behavior. if you behave cooperatively, so will others. it also provides a punishment for cheating- if you cheat, don't expect others to be nice in the future.

tacit collusion

when firms limit production and raise prices in a way that raises each other's profits, even though they have not made any formal agreement.

payoff matrix

when there are only two players, the interdependence between the players can be represented with a payoff matrix. a payoff matrix shows how the payoff to each of the participants in a two-player game depends on the actions of both.

collusion

when two companies cooperate to raise their joint profits.