unit 4: imperfect competition

Imperfect Competition

All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly

Pure (perfect) Competition

A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no non price competition; a market characterized by a very large number of buyers and sellers

Monopolistic Competition

A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which where there is considerable nonprice competition

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is very difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition

Price Maker

A seller (or buyer) of a product or resource that is able to affect the product or resource price by changing the amount it sells (or buys)

Price Discrimination

The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost

Non-price competition

Competition based on distinguishing one’s product by means of product differentiation and then advertising the distinguished product to producers

Duopoly

A market structure where two firms dominate the market for a particular good or service, resulting in limited competition and strategic interdependence between the firms

Homogenous Oligopoly

An oligopoly in which the firms produce a standardized product

Horizontal Merger

The merger into a single firm of two firms producing the same product and selling it in the same geographic market

Vertical Merger

The merger of one or more firms engaged in different stages of the production of a final product

Differentiated Oligopoly

An oligopoly in which the firms produce a differentiated product

Price leadership

An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and the others (the followers) soon announce identical or similar changes

Collusion

A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition

Barriers to Entry

Anything that artificially prevents the entry of firms into an industry

Fair-Return Price

The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it

Socially Optimal Price

The price of a product that results in the most efficient allocation of an economy’s resources and that is equal to the marginal cost of the product

Natural Monopoly

An industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product

Game Theory (Prisoner’s Dilemma)

A means of analyzing the pricing behavior of oligopolists that uses the theory of strategy associated with games such as chess and bridge

Nash Equilibrium

A set of choices where neither player can improve their payoff by changing their own strategy, assuming the other player stays put

Dominant Strategy

a course of action in game theory that yields a higher payoff for a player, regardless of what the other players choose

Game

A strategic interaction between two (or more) players, where one’s outcome depends on what the other does

Payoff

refers to the outcomes or rewards that players receive as a result of their decisions in a game

Monopoly outcome (collusive outcome)

a market result where a single firm is the sole producer, leading to higher prices, lower output, and a deadweight loss compared to a perfectly competitive market

Cartel

A formal aren’t among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically

Conglomerate Merger

The merger of a firm in one industry with a firm in another industry (with a firm that is neither a supplier, customer, nor competitor)

Merger

The combination of two (or more) firms into a single firm