Oligopoly and Monopolistic Competition - Vocabulary Flashcards

Vocabulary flashcards covering key concepts from the lecture on oligopoly and monopolistic competition, including structure, competition, collusion, pricing, and regulation.

Oligopoly

A market structure with a small number of firms; products may be homogeneous or differentiated; significant barriers to entry; firms’ decisions are interdependent; long-run economic profits can be positive.

Monopolistic Competition

A market structure with many firms selling differentiated products; free entry and exit; zero economic profits in the long run.

Interdependence

A situation in which each firm's profit-maximizing decision depends on the actions of other firms in the market.

Product Differentiation

The degree to which products are different from one another, affecting substitutability and pricing power.

Differentiated Product

A product that is similar to others but not identical, giving consumers preferences and allowing some pricing power (e.g., cereals, cars, detergents, cigarettes).

Homogeneous Product

Identical products that are perfect substitutes (e.g., steel, oil, gasoline, some computer components).

Barriers to Entry

Obstacles that prevent or make it difficult for new firms to enter a market; tends to be higher in oligopolies.

Collusion

An agreement among firms to fix prices or output; often illegal in many jurisdictions.

Cartel

A formal organization of producers that colludes to control prices or quantities; example: OPEC.

Bertrand Competition

An oligopoly model where two (or few) firms with identical products compete on price; undercutting can lead to prices equal to marginal cost.

Duopoly

An industry with two firms; a common setting for Bertrand-style price competition (e.g., two service providers setting prices).

Residual Demand

The portion of market demand that remains for a firm after accounting for the other firms’ prices and outputs.

Nash Equilibrium

A situation where no firm can improve its payoff by changing its strategy while the other firms’ strategies remain the same.

Long-Run Equilibrium (P = MC)

In some contexts, the long-run outcome in competitive settings where price equals marginal cost; described as the long-run competitive outcome.

MR = MC Rule

Profit-maximizing condition in which marginal revenue equals marginal cost.

HHI (Herfindahl-Hirschman Index)

A concentration measure: the sum of the squares of each firm’s market share; higher values indicate more concentration; used to assess market power and regulatory concerns.

Four Market Structures

The traditional categories: Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly; each differs in number of firms, product type, barriers to entry, and pricing power.

Price-Taker vs Price-Maker

Price-takers accept the market price (typical in perfect competition); price-makers have control over price (more common in monopolistic competition and oligopoly, to varying degrees).

The Broken Invisible Hand

The idea that market power can impair the efficiency of the competitive outcome; regulation may be warranted if there is collusion or excessive concentration.

Zero Economic Profits (Long Run)

In monopolistic competition, free entry and exit drive profits to zero in the long run; oligopolies can still earn positive profits in the long run.

Dueling Duopolies

A two-firm pricing dynamic where each firm responds to the other’s pricing decisions, illustrating strategic interaction in a duopoly (as in Exhibit 14.3).