AP MICRO: Oligopoly & Monopolistic Competition

how does imperfect competition deviate from perfect competition?

imperfect comp arises when one or more of the assumptions of perfect violated. This commonly includes:

• product differentiation

• barriers to entry

• limited number of sellers

how much market power does imperfect competition have?

• firms possess some degree of market power

• they can influence the price of their products, unlike firms in perfectly competitive markets.

what are the types of imperfect competition?

• monopoloy

• oligopoly

• monopolistic competition

imperfect competition & pricing and output decisions

• imperfectly competitive markets face downward-sloping demand curves

• MR = MC at profit maximization quantity

imperfect competition & efficiency

• leads to allocative inefficiency - firms tend to produce less and charge higher prices than in perfectly comeptitive markets - this leads to DWL

imperfect competition & barriers to entry

imperfect competition often has significant barriers to entry that prevent new firms from entering the market easily. These barriers can include high startup costs, control over essential resources, or government regulations.

imperfect competition & product differentiation

refers to the strategies used by firms to make their products distinct from competitors, allowing them to gain market power and charge higher prices.

imperfect competition & game theory

analyzes strategic interactions among firms in an oligopoly, where the decisions of one firm influence the actions of others. This framework helps firms understand competitive behavior and pricing strategies.

oligopoly (def)

a market structure dominated by a small number of large firms, leading to interdependent decision-making.

interdependence (def)

the profit of each firm is influenced by the action of others

duopoly

a special case of oligopoly with only two firms

collusion

an agreement among firms in an oligopoly to set prices or output levels to maximize collective profits, often at the expense of competition.

• illegal

cartel

a formal agreement among firms in an oligopoly to coordinate prices and output, often to increase profits and reduce competition. Cartels are typically illegal in many countries.

noncooperative behavior

firms act independently, often reducing overall profits.

dominant strategy

the best choice for a player regardless of the other player’s decisioin

nash equilbrium

a situation in which no player can benefit by changing their strategy while the other players keep theirs unchanged.

tit-for-tat strategy

a strategy in which a player replicates the opponent's previous action, promoting cooperation in repeated games.

antitrust policy

government laws to prevent monopolistic behavior

tacit collusion

a form of collusion where firms implicitly agree to coordinate actions without direct communication

price wars

agressive price cutting leading to minimal or zero profits

product differentiation in oligopoly

firms try to make their products seem unique to stand out in the market and hold more market power

price leadership

one dominant firm sets prices, and others follow

non-price competition

using advertising, branding, and product features instead of price to compete

monopolistic competition

a market structure combining elements of monopoly and perfect comp

product differentiation in monopolistic comp

this is the key feature distinguishing monopolistic comp from perfect comp

excess capacity

in monopolistic competition, where firms produce below the minimum average total cost, leading to inefficiency.

short run vs. long run equilbrium

firms can earn short-run profits, but they have normal profit in the long-run.

allocative effiency

occurs when resources are distributed in a way that maximizes consumer satisfaction, typically achieved when price equals marginal cost.

productive efficiency

occurs when goods are produced at the lowest possible cost, usually achieved when firms operate at the minimum point of their average total cost curve.