econ 201 ch 10

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econ 201 ch 10
2011-05-16 23:46:13

monopolistic competition and oligopoly
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  1. monopolistic competition
    • a market structure with many firms selling products tha are substitutes but different enough that each firm's demand curve slopes downward
    • rim entry is relatively easy
  2. how do sellers differentiate their products in monopolistic competition?
    • physical differences
    • location
    • services
    • product image
  3. excess capacity
    • the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost
    • firms with excess capacity could reduce average cost by increasing capacity
  4. oligopoly
    a market structure characterized by so few firms that each behaves interdependently
  5. undifferentiated oligopoly
    an oligopoly that sells a commodity, or a product that does not differ across suppliers
  6. differentiated oligopoly
    an oligopoly that sells products that differ across suppliers
  7. why have some industries evolved into oligopolies?
    • economies of scale
    • high cost of entry
    • crowding out competition
  8. what are the models of oligopoly?
    • collusion and cartels
    • price leadership
    • game theory
  9. collusion
    an agreement among firms to increase economic profit by dividing the market and fixing the price
  10. cartel
    a group of firms that agree to coordinate their production and pricing decisions to earn monopoly profit
  11. why is it difficult for a cartel to maximize profit?
    • differences in average cost
    • number of firms in the cartel
    • new entry into the industry
    • cheating
  12. price leader
    a firm whose price is matched by other firms in the market as a form of tacit collusion
  13. what are the obstacles of price leadership?
    • violates US antitrust laws
    • the greater the product differentiation among sellers, the less effective price leadership as a means of collusion
    • no guarantees other firms will follow the leader
    • without barriers to entry, a profitable price attracts new entrants, which could destabilize the agreement
    • some firms are tempted to cheat on the agreement
  14. game theory
    an approach that analyzes oligopolistic behavior as a series of strategic moves and counter-moves by rival firms
  15. prisoner's dilemma
    a game that shows why players have difficulty cooperating even though they would benefit from cooperation
  16. strategy
    in game theory, the operational plan pursued by a player
  17. payoff matrix
    in game theory, a table listing the payoffs that each player can expect from each move based on the actions of the other player
  18. dominant-strategy equilibrium
    in game theory, the outcome achieved when each player's choice does not depend on what the other player does
  19. duopoly
    • a market with only two producers
    • a special type of oligopoly market structure
  20. Nash equilibrium
    • a situation in which a firm, or a player in game theory, chooses the best strategy given the strategies chosen by others
    • no participant can improve his or her outcome by changing strategies even after learning the of the strategies selected by other participants
  21. tit-for-tat
    • in game theory, a strategy in repeated games when a player in one round of the game mimics the other player's behavior in the previous round
    • an optimal strategy for getting the other player to cooperate
  22. coordination game
    • a type game in which a Nash equilibrium occurs when each player chooses the same strategy
    • neither player can do better than matching the other player's strategy