Monopolist competition and oligopoly Flashcards
Define ‘independence’ of firms in a market
Where the decisions of one firm in a market will not have any significant effect on the demand curves of its rivals.
Define ‘product differentiation’
Where one firm’s product is sufficiently different from that of its rivals to allow it to raise the price without losing all customers to the rivals.
State the assumptions of monopolistic competition
There are quite a large number of firms, there is freedom of entry for new firms, and there is product differentiation.
Explain how monopolistically competitive firms determine price and output in the short run and the long run
Price and output are determined by the demand and cost curves, with profit-maximizing output where MR=MC and price is at the AR curve at this output.
Discuss the limitations of the monopolistic competition model
Information may be imperfect, it’s difficult to derive a demand curve for the ‘industry’, and does not consider non-price competition.
Discuss the major elements of non-price competition
Product development aims at creating products that stand out, while advertising seeks to inform and persuade the consumer about the product’s benefits.
Compare price and output levels among monopolistic competition, perfect competition, and monopoly
In monopolistic competition, price and output are determined where the demand curve crosses the Long Run Average Cost curve; in perfect competition, the demand curve is flat horizontal; and in monopoly, the demand curve allows for higher pricing due to less elasticity.
Define ‘collusive oligopoly’
Where oligopolists agree to limit competition between themselves, may set output quotas, fix prices, limit product promotion, or agree not to ‘poach’ each other’s markets.
Define ‘non-collusive oligopoly’
Where oligopolists have no agreement between themselves, whether formal, informal, or tacit.
Define ‘tacit collusion’
Where oligopolists avoid aggressive competition, following unwritten ‘rules’ of behavior like price leadership.
State the key features of oligopoly
Barriers to entry and mutual interdependence of the firms.
Describe the industry equilibrium for a cartel
Cartel members act as a single monopoly firm, setting output and price where the industry’s marginal cost equals marginal revenue.
State the conditions under which collusion in oligopoly is more likely
Collusion is more likely when there are few firms, well-known to each other, similar costs and products, a dominant firm, and significant barriers to entry.
Discuss the main reason for collusion breaking down in oligopolies
The main reason for the breakdown of collusion is the pursuit of individual profit maximization, which can lead to a price war.
Define ‘Game theory’
A method of decision-making in which alternative strategies are analyzed to determine the optimal course of action, depending on assumptions about rivals’ behavior.
