Monopolistic Competition and Oligopoly Flashcards
(19 cards)
Why does the demand curve slope downwards in monopolistic competition?
Because products are differentiated, some consumers are loyal and will still buy even if price increases slightly.
What are the key characteristics of monopolistic competition?
Many firms
Differentiated products
High ease of entry and exit
Firms have some price-setting power due to brand loyalty
What are the key characteristics of an oligopoly?
Few firms dominate the market
Products may be identical or differentiated
Significant barriers to entry
Firms behave strategically (consider rivals’ reactions)
How does monopolistic competition compare to perfect competition
Similarities:
Many firms
Free entry and exit
Differences:
Monopolistic competition has product differentiation, which gives firms market power
Downward-sloping demand curve for individual firms
What is the profit-maximising rule for a monopolistically competitive firm?
Produce the quantity where Marginal Cost (MC) = Marginal Revenue (MR).
What happens in the short run if a monopolistically competitive firm earns economic profit?
A:
Other firms are attracted to enter
Market share and demand for each firm decreases
Demand curve becomes more elastic
In the long run, profits tend to zero
What does long-run equilibrium look like in monopolistic competition?
Zero economic profit
Demand curve tangent to ATC curve
Still not efficient (P > MC and not minimum ATC)
Why is monopolistic competition considered inefficient?
Price > Marginal Cost (MC)
Output < Minimum Average Total Cost (ATC)
This results in excess capacity.
What is strategic behaviour in oligopoly?
Firms anticipate and react to the decisions of their rivals (e.g., pricing, advertising, output).
What is a duopoly?
An oligopoly with exactly two firms.
What is game theory?
The study of strategic decision-making, where outcomes depend on the actions of multiple decision-makers.
What are the three components of a game in game theory?
Rules – what actions are allowed
Strategies – what players choose to do
Payoffs – outcomes from combinations of strategies
What is a dominant strategy?
A strategy that is best for a player regardless of what the opponent does.
What is a Nash Equilibrium?
A situation where each player’s strategy is the best response to the other’s strategy – no one has an incentive to change their choice unilaterally.
In a monopolistic competition diagram, where is the profit maximising output?
Where MC = MR.
How do you find the profit-maximising price?
From Q* (where MC = MR), move up to the demand curve to find P*.
How is economic profit shown on a diagram?
The vertical distance between Price (on demand curve) and ATC at the profit-maximising quantity (Q), multiplied by Q.
What does the long-run diagram for monopolistic competition show?
Demand is tangent to ATC at Q*
Zero economic profit
Still P > MC and not minimum ATC → inefficiency
What is excess capacity?
The firm could lower average costs by producing more, but doesn’t due to lack of demand at a profitable price.
