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Chapter 14 Monopolistic Competition and Oligopoly
Terms in this set (15)
What is monopolistic competition?
Market in which firms can enter freely each producing its own brand or version of a differentiated product
market in which only a few firms compete with one another, and entry by new firms is impeded
What is a cartel?
Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits.
What are the characteristics of a perfect competition?
has many firms , yet identical products
What are the characteristics of a monopolistic competition?
1) Number of sellers
2) Free entry or exit?
3) Long-run economic profits
4) Product differentiated or identical?
5) Have market power?
2) Free entry and exit
3) Has zero economic profits in long-run
4) Products are differentiated
5) Has market power
Why is monopolistic competition less efficient than perfect competition?
Because a firm would be producing not at minimal average total cost. It is inefficient because firms set price higher than marginal cost, reducing consumer surplus and creating deadweight loss.
What are the barriers to entry in a oligopolistic market?
Scale economies, patents, brand, and strategic actions to prevent entry
What is the relation of price and marginal cost of a monopolistic firm in the short-run equilibrium?
In the short-run, price exceeds marginal cost and the firm has some monopoly power and earns prices?
What is the relation of price and average cost of a monopolistic firm in the long-run equilibrium? Profits?
In the long-run the price equals average cost, and the firm earns zero profit even though it has monopoly power.
What is Nash equilibrium?
set of strategies in which each firm does the best it can given its competitor's actions
What is a Courtnot model?
a model of oligopoly in which firms produce a homogeneous good, and each firm treats the output of its competitors as fixed and simultaneously decide how much to produce
What is Courtnot equilibrium?
equilibrium in the Courtnot model in which each firm correctly assumes how much its competitor will produce and set its own production level accordingly
What is a reaction curve?
relationship between a firm's profit maximizing output and the amount it thinks its competitor will produce. Equilibrium is determined where the two reaction curves intersect.
What is the Stackelberg Model?
oligopoly model in which one firms sets its output before other firms do
What is first mover advantage?
When a firm goes first, it sets the price and output level, making output large. The second firm must then take the first firm's output as given and set a low level of output for itself. Firm 1 also gets to enjoy economies of scale by producing at lower cost.
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