AP Econ Unit 4 - Imperfect Competition

monopoly power

measure of a monopolist’s ability to set the price of a good or service

barriers to entry

restrictions that make it difficult for new firms to enter a market

natural monopoly

occurs when a single large firm has lower costs than any potential smaller competitor

price maker

has some control over the price it charges

price effect

reflects how a change in price affects a firm’s revenue

output effect

a change in price affects the number of customers in a market

rent seeking

occurs when resources are used to secure monopoly rights through the policial process

price discrimination

when a firm sells the same good or service at a different price to different groups of customers

perfect price discrimination

when a firm sells the same good or service at a unique price to every customer

monopolistic competition

type of market structure characterized by low barriers to entry, many different firms, and product differentiation

product differentiation

process firms use to make a more attractive to potential customers

markup

difference between the price the firm charges and the MC of production

excess capacity

occurs when a firm produces at an output level smaller than the output level needed to minimize ATC (could be doing more)

oligopoly

form of market structure that exists when a small number of firms sell a differentiated product in a market with high barriers to entry

concentration ratios

used by economists to measure the oligopoly power present in an industry

duopoly

industry with two firms, rare in international/national markets

collusion

agreement among rival firms that specifies the price each firm charges the quantity it produces (shorter term, less formal)

cartel

a group of two or more firms that act in unison to form a joint monopoly

antitrust laws

attempt to prevent oligopolies from behaving like monopolies

mutual interdependence

market situation where the actions of one firm have an impact on the price and output of its competitors

price leadership

dominant firm in an industry sets the price that maximizes its profits and the smaller firms in the industry follow by setting their prices to match the price leader

tacit collusion

firms act in accordance with each other based on price leadership

game theory

branch of mathematics that economists use to analyze the strategic behavior of decision makers

prisoners dilemma

occurs when decision makers face incentives that make it difficult to achieve mutually beneficial outcomes

dominant strategy

when one player will always prefer one strategy, regardless of what his opponent chooses

Nash equilibrium

when all economic decision makers opt to keep the status quo, no incentive to change their decision

Tit for tat

long run strategy that promotes cooperation among participants by mimicking the opponents most recent decision with repayment in mind

backward induction

process of deducting backward from the end of a scenario to infer a sequence of optimal actions

decision tree

illustrates all of the possible outcomes of a sequential game

Sherman Antitrust Act

1890, first federal law limiting cartels and monopolies

Clayton Act

1914, targets corporate behaviors that reduce competition

predatory pricing

firms deliberately set their prices below average variable costs with the intent of driving rivals out of the market

network externality

the number of customers who purchase or use a product influences the quantity demanded