Monopolistic Competition and Oligopoly

Flashcards based on the core concepts of monopolistic competition and oligopoly as described in the lecture notes.

Monopolistic Competition

A market structure featuring many firms selling differentiated products, allowing firms some market power.

Oligopoly

A market structure dominated by a small number of firms, each with significant market power, leading to interdependent pricing and output decisions.

Differentiated Products

Products that are perceived by consumers as distinct from one another, often due to differences in quality, features, or branding.

Collusion

An agreement among firms in an oligopoly to restrict output and raise prices to maximize collective profits.

Market Power

The ability of a firm to influence the price of a product or service in the market.

Price Taker

A firm that has no ability to influence the market price and must accept it as given.

Cartel

A formal agreement among firms in an oligopoly to collude and act together to maximize profit.

Game Theory

A mathematical framework used to analyze strategic interactions among rational decision-makers.

Prisoner’s Dilemma

A scenario in which cooperative behavior yields a better outcome than individual self-interest, often illustrated in oligopoly contexts.

Kinked Demand Curve

A demand curve that reflects the idea that if one firm lowers its prices, others will follow, but if it raises prices, competitors will not, leading to price rigidity.

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs.

Entry and Exit

The process of firms entering or exiting a market based on profitability, which affects the market's long-run equilibrium.

Marginal Revenue (MR)

The additional revenue that is generated from selling one more unit of a good or service.

Marginal Cost (MC)

The change in total cost that arises when the quantity produced changes by one unit.

Productive Efficiency

A situation in which goods or services are produced at the lowest possible average cost.

Allocative Efficiency

A state of resource allocation where the price of a good or service is equal to the marginal cost of producing it.

Barriers to Entry

Obstacles that make it difficult for new firms to enter a market, often resulting in reduced competition.

Price Discrimination

The practice of charging different prices to different consumers for the same good or service based on their willingness to pay.