Market Entry and Monopolistic Competition Flashcards

Vocabulary flashcards reviewing concepts, empirical studies, and applications from Chapter 11 on market entry and monopolistic competition.

Monopolistic competition

A market structure served by many firms that sell slightly different products with no artificial barriers to entry.

Product differentiation

The process used by firms to distinguish their products from the products of competing firms.

Profit squeeze from entry

The three-sided impact on an existing firm when a new firm enters the market: market price drops, output quantity decreases, and average cost of production increases.

Motor Carrier Act of 1980

Federal legislation that removed entry restrictions in the U.S. trucking industry, leading to a freight price reduction of about $22\%$ due to new entrants.

Retail pricing of tires study

A study demonstrating that average tire prices decreased as the number of stores increased: $\$55$ with $2$ stores, $\$53$ with $3$ stores, $\$51$ with $4$ stores, and $\$50$ with $5$ stores.

Satellite vs. cable consumer surplus

The increase in monthly consumer surplus per consumer from $\$3.96$ to $\$5.22$ caused by the entry of a satellite firm, which forces an existing cable firm to lower prices and improve quality.

Long-run equilibrium in monopolistic competition

The state where new firms enter until economic profit is zero, profit is maximized where marginal revenue equals marginal cost, and price equals average cost.

Differentiation by location

A form of spatial competition where firms distinguish products through store placement, providing location convenience while driving long-run economic profit to zero.

Monopolistic competition trade-offs

The economic trade-off where average production cost is higher than the minimum possible cost, balanced by consumer gains in product variety and geographic convenience.

Happy Hour pricing

Price reductions near workplaces around $5:00\text{ P.M.}$ caused by increased customer mobility, which creates a higher elasticity of demand and a flatter demand curve.

1950s eyeglass market study

A study showing that states allowing advertising for eyeglasses had lower prices than states that banned advertising, proving that advertising promotes price competition.

Advertising as a high-confidence signal

The concept that large expenditures on advertising signal product quality to consumers, as costs are only profitable if recovered through repeat purchases.

South African consumer lender study

A study of $53,000$ loan offer mailings showing that sending men a picture of a woman instead of a man increased offer acceptance by an amount equivalent to cutting the interest rate by $\frac{1}{4}$.