34 terms

Lec 5: imperfect competition (ch12)


Terms in this set (...)

Independence (of firms in a market)
When the decision of one firm in a market will not have any significant effect on the demand curves of its rivals
Product differentiation
When one firm's product is sufficiently different from its rivals' to allow it to raise the price of the product without customer all switching to the rivals' products. A situation where a firm faces a downward-sloping demand curve
Excess capacity (under monopolistic competition)
In the long run, firms under monopolistic competition will produce at an output below their minimum-cost point
Interdependence (under oligopoly)
One of the two key features of oligopoly. Each firm will be affected by its rivals' decisions. Likewise its decisions will affect its rivals. Firms recognise this interdependence. This recognition will affect their decisions.
Collusive(共謀的) oligopoly
When oligopolists agree (formally or informally) to limit competition between themselves. They may set output quotas(定量), fix prices, limit product promotion or development, or agree not to "poach(侵犯)" each other's markets
Non-collusive oligopoly
When oligopolists have no agreement between themselves - formal, informal, or tacit(法定的)

Non-collusive oligopolists will have to work out a price strategy. This will depend on their attitudes toward risk and on the assumption they make about the behaviour of their rivals
A formal collusive agreement.

A cartel aims to act as a monopoly. It can set price and leave the members to compete for market share, or it can assign quotas. There is always a temptation for cartel members to cheat by undercutting the cartel price if they think they can get away with it and not trigger a price war
Quota (set by a cartel)
The output that a given member of a cartel is allowed to product (production quote) or sell (sales quota)
Tacit collusion
When oligopolists take care not to engage in price cutting, excessive advertising or other forms of competition. There may be unwritten "rules" of collusive behaviour such as price leadership

It can take the from of price leadership. This is where firms follow the price set by either a dominant firm in the industry or one seen as a reliable barometer of market conditions. Alternatively, tacit collusion can simply involve following various rules of thumb such as average cost pricing and benchmark pricing
Dominant firm price leadership
When firms (the followers) choose the same price as that set by a dominant firm in the industry (the leader).
Barometric firm price leadership
Where the price leader is the one whose prices are believed to reflect market condition in the most satisfactory way
Average cost pricing
Where a firm sets its price by adding a certain percentage for (average) profit on top of average cost
Price benchmark
This is a price which is typically used. Firms, when raising prices, will usually raise it from one benchmark to another
Cournot model
A model of duopoly where each firm makes its profit-maximising price and output decisions on the assumption that its rival will produce a particular quantity

The resulting price and profit are lower than under monopoly, but still higher than under perfect competition.
An oligopoly where there are just two firms in the market
Nash equilibrium
The position resulting from everyone making their optimal decision based on their assumption about their rivals' decisions

It will entail(需要) a lower level of profit than if companies had colluded
Takeover bid
Where one firm attempts to purchase another by offering to buy the shares of that company from its shareholders
Kinked(扭結) demand theory
The theory that oligopolists face a demand curve that is kinked at the current price: demand being significantly more elastic above the current price than below. The effect of this is to create a situation of price stability.

Firms are likely to keep their prices stable unless there is a large shift in costs or demand
Countervailing(補償的) power
When the power of a monopolistic/oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up
Game theory (theory of game)
The study of alternative strategies that oligopolists may choose to adopt, depending on their assumptions about their rivals' behaviour
The low-risk strategy of choosing the policy whose worst possible outcome is the least bad
The high-risk strategy of choosing the policy which has the best possible outcome
Dominant strategy game
Where different assumptions about rivals' behaviour lead to the adoption of the same strategy
Prisoners' dilemma
Where two or more firms (or people), by attempting independently to choose the best strategy for whatever the others are likely to do, end up in a worse position than if they had cooperated in the first place
Where a firm will cut prices, or make some other aggressive move, only if the rival does so first. If the rival knows this, it will be less likely to make an initial aggressive move
Credible threat (promise)
One that is believable to rivals because it is in the threatener's interests to carry it out
Decision tree (game tree)
A diagram showing the sequence of possible decisions by competitor firms and the outcome of each combination of decisions
First-mover advantage
When a firm gains from being the first one to take action
Monopolistic competition
It occurs where there is free entry to the industry and quite a large number of firms operating independently of each other, but where each firm has some market power as a result of producing differentiated products or services

Monopolistically competitive firms, because of excess capacity, may have higher costs, and thus higher prices, than perfectly competitive firms, but consumers may gain from a greater diversity of products

Monopolistically competitive firms may have less economies of scale than monopolies and conduct less research and development, but the competition may keep prices lower than under monopoly. Whether there will be more or less choice for the consumer is debatable
Long-run equilibrium
In the short run, firms can make supernormal profits.

In the long run, freedom of entry will drive profits down to the normal level.

The long-run equilibrium of the firm is where the downward-sloping demand curve is tangential(正切的) to the long-run average cost curve. The long-run equilibrium is one of excess capacity. Given that the demand curve is downward sloping, its tangency point with the LRAC curve will not be at the bottom of the LRAC curve. Increased production would thus be possible at lower average cost
Supernormal profits
In practice, supernormal profits may persist into the long run: firms have imperfect information; entry may not be completely unrestricted; there may be a problem of indivisibilities; firms may use non-price competition to maintain an advantage over their rivals
An oligopoly is where there are just a few firms in the industry with barriers to the entry of new firms. Firms recognise their mutual dependence.

Oligopolists will want to maximise their joint profits. This will tend to make them collude to keep prices high. On the other hand, they will want the biggest share of industry profits for themselves. This will tend to make them compete

They are more likely to collude: if there are few of them; if they are open with each other; if they have similar products and cost structures; if there is a dominant firm; if there are significant entry barriers; if the market is stable; and if there is no government legislation to prevent collusion
Bertrand model
In the Bertrand model, firms assume that their rivals' price is given. This will result in prices being competed down until normal profits remain
Consumers benefit from oligopoly
Whether consumers benefit from oligopoly depends on: the particular oligopoly and how competitive it is; whether there is any countervailing power; whether the firms engage in extensive advertising and of what type; whether product differentiation results in a wide range of choice for the consumer; how much of the profits are ploughed(開路) back into research and development; and how contestable(爭論的) the market is. Since these conditions vary substantially from oligopoly to oligopoly, it is impossible to state just how well or how badly oligopoly in general serves the consumer's interest