Unit 4: Imperfect Competition

imperfect competition

a market that doesn't meet requirements for perfect competition; implications include high prices, low production levels, low quanitity, and inefficiency

market power

refers to a firm's ability to influence the price it charges for a good/service; does not indicate unlimited, for consumers have limits; occurs in monopolies, monopolistic competition, and oligopolies

market structure

perfect competition, monopoly, oligopoly, and monopolistic competition; classification depends on number of firms in market and whether goods are identical or not

differentiated goods

goods that are different but considered somewhat substitutable by consumers; in oligopolies and monopolistic competition

monopoly

an industry controlled by a monopolist; one firm; products are unique; price maker; high barriers to entry; difficult to find (legality); EX: Amtrak, Microsoft; can earn a positive economic profit during long run

monopolist

a firm that is the only producer of a good that has no close substitutes

oligopoly

an industry with only a small number of firms; product differentiation or identical products; a lot of control over price (market power); high barriers to entry; EX: airlines; caused by economies of scale

oligopolist

a producer in an oligoploy

concentration ratios

measure the percentage of industry sales accounted for by the "x" largest firms, for example the 4-firm or the 8-firm ; 4-firm means firms account for 25%, 20%, 25%, and 10% of industry sales (overall 70% of industry; higher _ than 4 or 8 = oligopoly

monopolistic competition

a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is low barriers to enter and exit from the industry in the long run; common in service industries and production; each producer has some ability to set the price of their product; EX: restaurants, retail price; graph is the same as monopoly's except that reaches equalibrium in LR; is inefficient; product differentiation by style/type, location, and quality

product differentiation

is an attempt by a firm to convince buyers that its product is different from the producers of other firms in the industry

barrier to entry

something that prevents other firms from entering the industry; monopolists must have this to sustain economic profit; types include control of scarce resource/input, economies of scale, technological superiority, and government created barriers

economies of scale (barrier to entry)

markets with large fixed costs should spread it over a large volume of firms; causes large firms to be more profitable and drive out smaller firms; established firms have cost advantage over any potential entrant; causes natural monopoly

natural monopoly

exists when economies of scale provide a larger cost advantage to a single firm that produces all of an industry's output; minimum efficient scale is so large that the monopoly experiences economies of scale over the entire range of quantities that consumers might demand; most are local utilities; pose a special challenge to public policy; large firms have low ATC; can be dismantled by public ownershop and regulation; TR and DWL decrease with regulation

technological superiority (barrier to entry)

not a _ over the long run since competitors invest in technology; can be caued by network externalities

network externalities

condition that arises when value of a good to a consumer rises as the number of other people who also use the good rises; creates advantage

government created barriers to entry

patent, copyright; both are incentives; higher price for the good that holds while the legal protection in effect compensates the inventors (no protection = consumer benefits)

patent

gives the owner a temporary monopoly in the use or sale of an invention; typically lasts 10 or 20 years; applies to new products

copyright

gives the ____ holder for a literary or artistic work the sole right to profit from that work for a specified period of time; usually a creator's lifetime

single price monopoly graph

D curve is entire market D curve; MR is below D; produce at MC = MR but charge above at the D curve; profit = ATC to D curve; socially optimal/allocatively efficient is when MC = D; fair return/productively efficient is when ATC = D (breakeven)

price effect

after a price increase, each unit sold sells at a higher price, which tends to raise revenue

quantity effect

after a price increase, fewer units are sold, which tends to lower revenue

monopoly total revenue graph

increases and then decrease after MR intersects the x-axis; left of that point = elastic & quantity effect overtakes price effect; point = unit-price elasticity; right of that point = ineleastic & price effect overtakes quantity effect

how to increase profit (monopoly)

MR > MC = produce more; MR < MC = produce less; MR = MC = profit maximization

public ownership

of a monopoly, the good is supplied by the government or by a firm owned by the government; can set prices based on criterion of efficiency; bad in practice

price regulation

limits price that monopolist is allowed to charge; common in USA; most local utilities; is a price ceiling

licenses

government or legal permission to operate a business or ise a protected idea; often limits entry into market

product superiority

when a firm's product is seen as higher quality or more desireable than their competitors

vertical integration

acquire a part of the production process to control supply or increase profits; barrier to entry; EX: Netflix Originals

horizontal integration

firm merges with competitors to expand market share; barrier to entry; EX: Disney + Pixar

single-price monopolist

charge all consumers the same price; doesn't participate in price discrimination; EX: small-town gas station

price discimination

sellers engage in this when they charge different prices to different consumers for the same good; monopolists; EX: airline tickets; adds to TR because consumers have various sensitivity to price; charge more to those with inelasticity (high payers); charge less to those with elasticity (low payers); creates high CS; firms must have monopoly power, be able to segregate the market, and consumers can't resell products

perfect price discrimination

takes place when a monopolist charges each consumer their willingness to pay---the maximum amount the consumer is willing to pay; profit maximization; CS = 0; monopolist is closer to this when there are many different prices; monopolists producer with allocative efficiency (DWL = 0); common techniques include advance purchase restrictions, volume discounts, and 2-part tariffs; produce at MR = D

long run MR and D shifts

entry of producers = leftward shift of MR and D + profit; exit of producers = rightward shift of MR and D + loss

excess capacity

firms produce less than the output at which ATC is minimized; firms in monopolistically competetive industries; inefficient; monopolistic competition then doesn't produce at minimum-cost output

brand name

a name owned by a particular firm that distinguishes its products from those of other firms

non-price discrimination

way to attract consumers beyond price; product differentiation is the only way firm can gain market power in attempt to make demand for the product inelasticity; differentiation by style/type, location, and quality

interdependence

firms have this when the outcome/profit of each firm depends on the actions of the other firms in the market; characterizes a monopoly

duopoly

an oligopoly consisting of only 2 firms; each firm is known as a duopolist; MC = 0; sell lower quantity at higher price; solution to lack of profit = collusion and cartel

collusion

firms engage in this when they cooperate to raise their joint profits; in competetive industries, positive quantity effect and negative price effect occur; very common in oligopolies because it is more profitable; constraints include antitrust policy, high number of firms, complex products and pricing schemes, and differences in interests

cartel

is a group of firms that agree to increase prices and reduce output in order to raise their joint profits; EX: OPEC

positive quantity effect

one more unit is sold, increasing the total revenue by the price at which that unit is sold

negative price effect

in order to sell one more unit, the monopolist must cut the market price on all units sold; reason why MR < P

noncooperative behavior

when a firm acts in their own self-interest, ignoring the effects of their actions on each other's profits; carries out goal of profit maximization; common among high number of firms

price fixing

an agreement among firms to charge one price for the same good (typically high)

game theory

is the study of behavior in situations of interdependence

payoff

of a player in a game is that players' reward, such as oligopolist's profit; depends on all players of the game

payoff matrix

a table that shows the payoffs that each firm earns from every combination of strategies by the firms; shows interdependence; firms are better off if both choose the lower output, but it's in each firm's interest to choose a higher output

prisoner's dilemma

is a game based on 2 premises: (1) each player has an incentive to choose an action that benefits that player at the other player's expense (2) when both players follow that incentive, both are worse off than if they had acted cooperatively

dominant strategy

an action is this when it is a player's best action regardless of the action taken by the other player; EX: confessing crime; not every game has this; occurs in payoff matrix if there are 2 circles in the same column/row

nash equalibrium

also known as a noncooperative equalibrium, is a result when each player in a game chooses the action that maximizes his or her payoff, given the actions of other people; occurs in payoff matrix if there are 2 circles in the same box

strategic behavior

a firm engages in this when it attempts to influence the future actions of other firms; can behave as if engaging in collusion; occurs in long-run

tit-for-tat

a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period; form of strategic behavior; earns higher profit than always cheating

tacit collusion

when firms limit production and raise prices in a way that raises each other's profits, even though they haven't made a formal agreement; very common

price leadership

one firm sets its price first, and other firms then follow

nonprice competition

firms that have tacit understanding not to compete on price often engage in intense _, using advertising and other means to try to increase their sales

antitrust policy

involves efforts by the government to prevent oligopolistic industries from becoming or behaving like monopolies

price war

occurs when tacit collusion breaks down and agressive price competition causes prices to collapse