Ch 9 - Imperfect Competition: Monopolistic Competition and Oligopoly

Monopolistic Competition

Monopolistic Competition

Firms in this market structure have characteristics of both a monopoly and perfect competition

Inefficiency

monopolistically competitive firms are not allocatively efficient. P is unequal to MC, as price tends to be greater than MC

Easy Entry and Exit

new firms are able to enter and exit the very easily so when new firms arrive, the demand decreases for other existing firms.

Differentiated Products and Nonprice Competition

non-price competition focuses on product promotion which set them apart from other rivals

Excess Capacity

When the demand for a good or service is less than the amount of supply which the firm would provide to the market.

Oligopoly

In this case, a number of firms within the same industry are dominating the market. Due to constant competition between firms, this leads to less increases in price

Collusion

is the illegal alliance of two opposing firms in an attempt to disrupt market equilibrium.

antitrust policy

This policy aims to prevent the creation of oligopolies from developing into monopolies as the lack of competition is not good for the economy and consumers.

High entry barriers

Only a few firms are established in this market as if it were easier to enter, more firms would have made use of the economic profit earned

Few Dominant Firms

only these firms sell differentiated or identical products.

Price Leadership

a price leader in the market is able to set prices in order to increase profits

Collusion

this occurs when rivals team up together to maximise their profits.

Game theory

in mathematics and real life is the analysis of the method or strategy which people use to strategically win a game

An equilibrium in game theory and oligopoly

when both firms reach a mutual understanding of using the dominant strategy.

Dominant Strategy

the best choice for one player regardless of what the other player chooses

When Price is greater than Marginal Cost and ATC

Occurs in the relationships of both monopolistic competition and oligopoly

When marginal revenue and marginal cost are equal to each other

Is a profit maximisation method for both Monopolistic competition and oligopoly