Micro 4.1-4.5 Imperfect Competition

types of imperfect competition

monopoly, oligopoly, monopolistic competition

monopolistic competition characteristics

many sellers, low barriers to entry, differentiated good, some pricing power

oligopoly characteristics

few sellers, high barriers to entry, price power, interdependent

monopoly characteristics

one seller, no close substitutes, high barriers to entry, price power

high barriers to entry

high startup costs, government regulations, established customer loyalty

Imperfect competition demand curves

demand is downward sloping, as to sell the next unit, must lower the price of all previous units as well

allocative efficiency of imperfect markets

not allocatively efficient (P>MC), underproduce, overcharge

why MR is less than P in monopolies

must lower price of all units to sell the next unit; MR falls faster than price

productive efficiency of monopolies

not productively efficient as not producing at minimum point of ATC

natural monopoly

a market that runs most efficiently when one large firm supplies all of the output

price discrimination

the division of consumers into groups based on how much they will pay for a good

to price discriminate, firm must

prevent resale, determine customer's personal demand elasticity

perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

price discrimination allocative efficiency

allocatively efficient

monopolistic competition in the long run

if a firm is running a profit, other firms will enter and shift demand and marginal revenue to the left due to more substitutes.

shutdown rule

operate if P > AVC, shut down if P < AVC

why monopolistic competitive firms are not productively efficient

produce at downward sloping part of ATC (economies of scale, not constant economies of scale)

monopolistic competitive firms allocative efficency

not allocatively efficient (P > MC), markup

cost change that makes monopolistic competitive firms run at loss

fixed costs increase, variable costs increase

collusion outcome

if firms collude, they want to collectively produce where they make the most profit

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Nash equilibrium

a situation in which each firm chooses the best strategy, given the strategies chosen by other firms

excess capacity

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

Game theory

the study of how people behave in strategic situations