Chapter 11: Monopolistic Competition and Oligopoly

Monopolistic competition

Relatively large number of sellers, differentiated products, easy entry/exit

Product differentiation

Variations of particular product

Product differentiation

________ can prevent duplication.

Non-price competition

Product differentiation + advertising

Four firm concentration ratio

Ratio of the output (sales) of the four largest firms in an industry relative to total industry sales

Herfindahl index

Sum of the squared percentage market shares of all firms in the industry

Excess capacity

Plant and equipment that are underused because firms are producing less than the minimum-ATC output

Oligopoly

Market dominated by a few large producers of a homogeneous or differentiated product

Homogeneous oligopoly

Standardized products

Differentiated oligopoly

Differentiated products

Rivals

________ can either match price changes or ignore price changes.

Strategic behavior

Self-interested behavior that takes into account reactions of others

Mutual interdependence

A situation in which each firm’s profit depends not entirely on its own price and sales strategies but also on those of the other firms

Interindustry competition

Competition b/w 2 products associated w/ different industries

Import competition

Competition b/w foreign products

Game theory

Study of how people behave in strategic situations

Collusion

Cooperation w/ rivals rather than work competitively/independently

Kinked demand curve

Demand is highly elastic above the going price P0 but much less elastic or even inelastic below that price

Price war

Successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares

Cartel

A group of producers that typically creates a formal written agreement specifying how much each member will produce and charge

Price leadership

The dominant firm initiates price changes and all other firms more or less automatically follow the leader