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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
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how do sellers differentiate their products in monopolistic competition?
- physical differences
- location
- services
- product image
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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
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oligopoly
a market structure characterized by so few firms that each behaves interdependently
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undifferentiated oligopoly
an oligopoly that sells a commodity, or a product that does not differ across suppliers
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differentiated oligopoly
an oligopoly that sells products that differ across suppliers
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why have some industries evolved into oligopolies?
- economies of scale
- high cost of entry
- crowding out competition
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what are the models of oligopoly?
- collusion and cartels
- price leadership
- game theory
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collusion
an agreement among firms to increase economic profit by dividing the market and fixing the price
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cartel
a group of firms that agree to coordinate their production and pricing decisions to earn monopoly profit
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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
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price leader
a firm whose price is matched by other firms in the market as a form of tacit collusion
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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
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game theory
an approach that analyzes oligopolistic behavior as a series of strategic moves and counter-moves by rival firms
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prisoner's dilemma
a game that shows why players have difficulty cooperating even though they would benefit from cooperation
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strategy
in game theory, the operational plan pursued by a player
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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
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dominant-strategy equilibrium
in game theory, the outcome achieved when each player's choice does not depend on what the other player does
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duopoly
- a market with only two producers
- a special type of oligopoly market structure
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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
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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
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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
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