Market Structures, Trade, and Game Theory

A set of vocabulary flashcards covering market structures, product differentiation, international trade classifications, game theory concepts, and oligopoly competition models from the lecture notes.

Monopolistic Competition

A market structure characterized by many firms selling differentiated products, where entry and exit are relatively easy in the long run. Each firm faces a downward-sloping demand curve because its product is unique, giving it a degree of market power.

Oligopoly

A market structure dominated by a small number of firms, characterized by mutual interdependence where each firm's decisions regarding pricing or output directly affect—and are affected by—the actions of its competitors.

Product Differentiation

The practice of making a product perceptibly different from its competitors through physical characteristics, location of sale, support services, or subjective image (branding and advertising), thereby reducing product substitutability and enabling non-price competition.

Intra-industry Trade

The simultaneous import and export of goods within the same industry category between two nations (e.g., exporting cars and importing cars), driven heavily by consumer demand for product variety and economies of scale according to Taylor and Weerapana.

Interindustry Trade

The international trade of goods belonging to entirely distinct industries (e.g., exporting agricultural goods to import commercial aircraft), primarily driven by classic comparative advantage and differences in natural resource endowments.

Excess Capacity

The economic inefficiency in monopolistic competition where a firm produces below its efficient scale (the minimum point on its Average Total Cost curve) because its downward-sloping demand curve is tangent to the ATC curve on its downward-sloping portion at the zero-profit long-run equilibrium.

Strategic Behavior

A firm's plan of action that explicitly takes into account the expected actions and reactions of its competitors.

Game Theory

The formal mathematical framework used to analyze situations in which players (such as firms) make strategic decisions that depend on the behavior of other players.

Cooperative Outcome

The result reached when players in a game coordinate their strategies or act jointly to maximize their collective payoffs (such as multi-firm profits).

Non-cooperative Outcome

The result reached when players act independently out of self-interest, without enforceable agreements or trust between one another.

Nash Equilibrium

A strategic situation where each player chooses their best strategy given the strategies chosen by all other players, resulting in a state where no player has an incentive to unilaterally change their choice.

Cournot Competition

An oligopoly model where firms compete simultaneously by choosing the quantity of output they will produce, taking their rivals' output as a given.

Bertrand Competition

An oligopoly model where firms compete simultaneously by setting prices rather than quantities. If the goods are identical, this leads firms to undercut each other until price equals marginal cost ($P = MC$).

Explicit Collusion

An open or formal agreement among firms in an oligopoly to restrict output, set uniform prices, or divide market shares to act collectively like a monopoly (often forming a cartel).

Tacit Collusion

An informal, unspoken understanding among oligopoly firms to avoid price competition and keep prices high without explicit or direct communication (often achieved through price leadership).