Unit 4: Firm Behavior and Market Structures

Monopolistic Competition Characteristics

hundreds of competition, slightly different products, some price control, low barriers to entry

ex. restaurants, clothing company

Oligopoly Characteristics

few firms, slightly diff. products, a lot of price control, high barriers to entry

ex. car firms, cereal firms

Monopoly Characteristics

one firm, unique products, price makers, high barriers to entry

ex. Amtrak

Natural Monopoly

it’s natural for only one firm to produce b/c they can produce at the lowest ATC

Product Superiority

when a firm’s product is seen as having high quality or more desirable than their competitors, giving it market power

Demand curve of a monopoly

downward sloping

Why is MR below D curve?

companies must decrease price on all units sold in order to sell more units

Q effect and P effect dominations

Q effect dominates first half of TR curve, P effect dominates second half of TR curve

Monopolies Profit-Maximizing point

MR = MC

Quantity Effect

the sale of 1 or more unit increases total revenue by the price at which the unit is sold

Price Effect

in order to sell that last unit, the monopolist must cut market price on all units sold, this reduces total revenue

Monopolies price

On demand curve straight up from MR = MC

Profit on a monopoly graph

from demand curve straight down to ATC

Monopoly surpluses compared to perfect competition

more producer surplus, less total and less consumer surplus

Consumer/producer surplus on monopoly graph

CS: above profit

PS: profit

there is dwl

Public Ownership

the good is supplied by the government or by a firm owned by the government

Price Regulation

limits the price that a monopolist is allowed to charge

Allocatively Efficient

P=MC

Normal Economic Profit

P=D=ATC

Fair return

P=ATC

Revenue Maximizing

MR=0

Single Price

monopoly that must sell the same price to all consumers

Price Discrimination

monopoly that’s able to sell different units of a good/service for different prices when cost of production is the same

seeks to charge customer what they are willing to pay in order to increase profits

ex. haircut based on gender and age

Price Discriminator requirements

1.) must have monopoly power

2.) must be able to segregate the market

3. consumers must not be able to resell product

Perfectly discriminating graph

several prices, no CS, increased profit, no dwl

Non-price Competition

a way to attract consumers beyond price

product differentiation

Unregulated vs regulated natural monopoly surpluses

Oligopoly

an industry with only a small number of firms

Mutual Interdependence

few firms constitute an industry; each firm must consider the reactions of its competition to its decisions

Collusion

firms cooperate to raise their joint profits

Cartel

a group of firms that agree to increase prices and reduce output in order to raise their joint profits

Noncooperative Behavior

when firms act in their own self-interest, ignoring the effects of their actions on each other’s profits

Game theory

study of behavior in situations in interdependence

Oligopoly productive/allocatively efficient

not allocatively efficient (P>mc), not productively efficient (operate on downward sloping portion of ATC curve)

Dominant Strategy

a player’s best action, regardless of what the opponent does

Nash equilibrium

the result when each player chooses the action that maximizes their payoff, given the actions of the other player

Payoff matrix

table that shows all possible outcomes for each firm depending on choices they and their competitors will make

Price Leadership

one firm sets its price and the other firms follow

How to tell dominant strategy

2 circles for a firm across the row/column

How to tell Nash equilibrium

2 circles in a box

Types of oligopolies

Price leadership, colluding, non colluding: match lower prices or ignore price increases