"Chapter 13: Monopolistic Competition and Oligopoly" Mega set

A firm in an oligopolistic market
can set its price and output to maximize profits
What attributes to the real differences in differentiating between goods and services?
-functional features
-design
-materials
The demand curve for a monopolistically competitive firm is
downward-sloping
An _______ is a market dominated by a few large producers of a homogeneous or differentiated product
oligopoly
In long-run equilibrium, monopolistically competitive firms
will just break even and will make no economic profit
Firms often merge, forming oligopolies, in order to
-increase control over price
-gain greater control over market supply
-become a larger buyer of inputs
Two types of market models that closely approximate many markets in the real world are
monoplistic competition and oligopoly
In the short run, monopolistically competitive firms maximize profits or minimize losses by producing the output level where
marginal revenue equals marginal cost
Entry of new firms into monopolistically competitive industries is relatively easy because
capital requirements are low
When measuring industry concentration, the four-firm concentration ratio is the percentage ratio of total industry _______ for the four largest firms in an industry realitive to total industry sales
sales
Oligopolistic behavior implies that oligopolists prefer competition
-through product development
-through advertising
Oligopolies have:
fewer firms than monopolistic competition
The equality of price and minimum average total cost yields technical ________ efficiency; the equality of price and marginal cost yields ________ efficiency
productive, allcoative
Multiple models are used to study oligopolies because oligopolies
-encompass a greater range and diversity of market situations
-cannot estimate both their demand and marginal revenue curves due to rivals’ reactions
Firms in an oligopoly may produce
either a homogeneous product or a differentiated product
Productive efficiency in monoploistically competitive markets does not occur in the long run because firms set the price
on the demand curve where MR=MC to maximize economic profit, making output less than optimal for society’s perspective
______ means illegal cooperation with rivals
collusion
To achieve economic efficiency that reduces the number of resources used but increases the number of socially optimal outputs requires a triple equality. The three components that must be equal are?
-marginal cost
-minimum average total cost
-price
Three models used to study pricing and output by oligopolies are
-the kinked-demand curve model
-price leadership model
-collusive pricing model
Compared to monopolies, oligopolies
give the appearance of increased competition
What does a demand curve look like for an oligopolist?
it could be a straight line or kinked line
Advertising increases efficiency by
-facilitating the introduction of new products
-lowering search costs for consumers
What helps a product differentiate from another
-varying degrees of customer service
-more or less convenient locations
-different physical characteristics
A monoplistically competitive firm’s demand curve is
downward-sloping like the demand curve for a monopoly, not horizontal like those in purely competitive markets
The benefits to oligopolists from collusion are:
-it possible prohibits the entry of new rivals
-it increases profits
-it reduces price uncertainty
Firms in monopolistic competition produce goods with:
-varying degrees of customer service
-slightly varying physical characteristics
The study of how people behave in strategic situations is called ______ _______
game theory
Which of the following correctly describes the difference between products under pure competition versus products under monoplistic competition
Standardized products are sold in pure competition but differentiated products are sold in monopolistic competition
When the ______ is stable, oligopoly prices tend to be stable
economy
In the long-run equilibrium, monopolistically competitive firms
will just break even and make no economic profit
When plant and equipment are underused because firms are producing less than minimum-ATC output, this is known as having _______ _______
-excess capacity, productive inefficiency
In the long run, if a monopolistically competitive firm is earning normal profits (breaking even), then it should
not exit the industry because both explicit and implicit costs are covered
Which of the following are attributes that provide real differences in differentiating between goods and services?
-function features
-materials
-design
Which of the following are shortcomings of the kinked-demand analysis of oligopoly?
-Oligopoly prices are not as rigid as the kinked-demand theory implies
-The kinked-demand curve explains price inflexibility not price itself
Managers can identify excess capacity by measuring the gap between
the minimum average total cost output and the profit-maximizing output
What are the typical characteristics of monopolistic competition
-no collusion
-independent
-small market share
The use of advertising by oligopolists
-may increase or decrease prices
-may increase or decrease competition
Advertising may decrease economic efficiency if it
increases monopoly power
The Herfindahl index equals:
the sum of the squared percentage market shares of all firms in an industry
Oligopolies typically are not desirable because they
do not achieve allocative efficiency because their price exceeds marginal cost
In a non-collusive olgiopolistic industry, prices are generally stable for the following?
-demand reasons
-cost reasons
What are the positive effects of large oligopolists not advertising?
-a reduction of advertising would help lower prices and possible increase product output
-the lack of manipulative info would reduce the chance of a firm becoming a monopoly
Advertising can reduce efficiency by
-providing misleading info
-manipulating consumer preferences
An olgopolistic firm’s marginal revenue curve is made up of two segments if:
its rivals match a price cut but ignore price increse
Barriers to entry into an oligopoly most resemble those of a:
pure monopoly
Firms in an oligopoly may produce
either a homogeneous product or a differentiated product
Monopolistically competitive firms are not productively efficient because
output is less than society’s optimal level because a producer’s average total cost per unit is not at its lowest possible cost
A monopolistically competitve firm may be able to continue earning profit in the long run
through further product differentiation
Monopolistic Competiton
Market Structure in which barriers to entry are low and many firms compete by selling similar but not identical Products
A monopolistic competitive firm must __ its prices to sell more, so its marginal revenue curve will slope __ and be __ its demand curve
cut, downward, below
Average revenue is always equal to
Price
Output effect
Firm cuts prices it will be able to sell more units
Price effect
Cuts prices sell more units, however it will receive less money for each unit that it could have sold at a higher price
Every firm that has the ability to affect the price of a good/service will have
A marginal revenue curve that is below its demand curve
Monopolistic competitive firm maximizes profits in the short run
-produce at level where Marginal revenue and cost are equal
-demand curve determines the price at the profit maximizing level of output
-Profit = (P-ATC) x Q
-Monopolistic competitive firm will max profits where P>MC
What happens to profits in the long run?
If one firm continues to make an economic profit new firms likely to enter the market
How does the entrance of new firms affect the profit of existing firms?
-Shift demand to left as consumers buy fewer goods at the previous price, more elastic consumers have additional producers
-Over time demand curve shift to a point of tangency with the ATC curve, break even
-exit if suffer economic losses in long run, shift back to right to break even
Is Zero economic profit inevitable in the long run?
-Differentiate or sell at lower costs, other firms will duplicate
-inevitable return to zero holds if firm stands still and fails to lower costs/differentiate
-Firms must convince consumers greater value of their product over competitors to maintain profit
Long run equilibrium, monopolistic vs competitive
monopolistic price higher than marginal cost, do not prodce at min ATC.
Eliminate economic profits
Excess capacity
Monopolistically competitive firms, increase capacity they could produce at a lower average cost
Difference between perfect and monopolistic competition
Downward slopes of the demand curve
Firms differentiate to appeal to consumers, consumers thus
Trade off paying a price that is >MC and not at min ATC for the benefits of receiving a differentiated product more closesly aligned with their tastes
Marketing
activities necessary for a firm to sell a product to consumer
-What produce, how advertise, where distribute
Brand management
Actions of firm to maintain differentiation of product over time, stave off duplication efforts
Advertising
Make products more desirable than competitors, shift demand to right and make more inelastic
Increases firms costs, cost/benefit study to determine effect on profit
Trademark
legal protection against other firms using products name
– chance becomes so widely used for type of product no longer associated with company
-difficult to enforce, internationally
What makes a firm successful?
Differentiate product and produce at lower ATC creates value for customers
other factors- overhead costs/consumer preferences may change
Sheer chance effects profitability