Chapter 12: Imperfect Competition

This set of flashcards covers vocabulary and key concepts from Chapter 12 on Imperfect Competition, including monopoly, price discrimination, oligopoly, and market measurements.

Price setters

Companies with market power that choose the price they charge and use strategies to increase and maintain profits.

Barriers to entry

Conditions that prevent other companies from entering a market, allowing existing firms to maintain long-term profits.

Technological barriers

Entry barriers related to the production process, such as control over essential inputs, exclusive knowledge, dealership contracts, or economies of scale.

Network effects

A phenomenon where the value of a product or service increases for consumers as more people use it.

Direct network effects

Occur when the value of a good increases directly with the number of users, such as on social media platforms like Facebook or X.

Indirect network effects

Occur when a platform connects two types of users and its value depends on the number of users on the other side, such as advertisers and readers in a newspaper.

Natural monopoly

A market structure occurring when economies of scale are so large that production is most efficient with only one firm, often due to high fixed costs.

Patent

A legal right granted for approximately $20$ years that prevents others from making or using an invention without permission, providing incentives for research and development.

Copyright

A legal right protecting creations like text, film, and software from unauthorized copying or reproduction.

Entry limit pricing

A strategy where existing companies charge prices below their profit-maximizing level to deter potential competitors from entering the market.

Predatory pricing

Temporary pricing below average cost used by existing companies to drive out or discourage new market entrants.

Monopoly

A market structure where a single company serves the entire market for a commodity with few substitutes.

Output rule

The profit-maximization rule for a monopolist where marginal revenue equals marginal cost ($MR = MC$).

Shutdown rule

The principle that a firm should stop production in the short run if $p < AVC$ and in the long run if $p < AC$.

Mark-up

The ratio or percentage gap between price and marginal cost ($p/MC$) used as a direct measure of market power.

Deadweight loss (DWL)

The welfare loss associated with a monopoly because the monopolist produces a quantity where some consumers' willingness to pay exceeds the marginal cost.

Rent-seeking

The practice of spending profits to influence policymakers and secure a monopoly position, considered an efficiency loss.

Marginal cost pricing

A regulatory policy where the government caps the selling price so that $p = MC$ to increase welfare.

Average-cost pricing

A regulatory solution for natural monopolies where $p = AC$, allowing the firm to break even without government subsidies while minimizing welfare loss.

Price discrimination

A strategy where producers sell the same product at different prices to different customers based on their willingness to pay.

Perfect price discrimination

A situation where a monopolist charges every consumer their exact maximum willingness to pay, completely eliminating consumer surplus.

Market segmentation

Direct price discrimination where the producer divides customers into groups based on measurable characteristics like age or status (e.g., student discounts).

Self-selection

Indirect price discrimination where consumers choose from a menu of options, such as business versus economy airline tickets.

Intertemporal price discrimination

Pricing strategies based on when the good is offered, such as charging high prices early in a season and lowering them during sales.

C4 benchmark

A measure of market concentration calculated as the sum of the market shares of the four largest companies.

Herfindahl-Hirschman Index (HHI)

A measure of concentration calculated as the sum of the squared market shares of all firms; values above $1800$ often trigger regulatory investigation.

Oligopoly

A concentrated market structure dominated by a few suppliers where strategic interaction and interdependence exist.

Cartel

A group of companies in an oligopoly that coordinate to maximize joint profits, often reaching outcomes similar to a monopoly.

Bertrand Competition

A model where firms compete by setting prices, leading to a Nash equilibrium where $p = MC$ for homogeneous products.

Cournot competition

A model where firms compete by choosing production quantities, resulting in prices higher than marginal cost ($p > MC$).

Reaction function

A function describing a company's optimal response in quantity based on the chosen quantity of its competitor.

Vertical product differentiation

Differences in products based on objective quality where all consumers prefer the higher-quality option at equal prices.

Horizontal product differentiation

Differences in products based on subjective ratings, such as brand or flavor preferences.

Monopolistic competition

A market structure with many suppliers and free entry where each firm offers a unique product and acts as a price setter.

Excess capacity

The characteristic of monopolistic competition where firms produce less than the quantity required for minimum efficient scale ($AC > \text{minimum AC}$).