9. Micro -- Profit Maximization under Monopolistic Competition & Oligopoly -- Dunbar

Monopolistic Competition

This term refers to a market structure in which there are a large number of relatively small firms each producing similar (but not identical) products. Examples -- restaurants in a large city, attorneys, family physicians, plumbers, coffee shops, etc.

"Chronic Excess Capacity"

This develops in "Monopolistically Competitive" markets because it is very easy for new firms to start up their own business (e.g. restaurant) and the market easily becomes oversaturated, leading to an underutilization of the resources devoted to that industry.

"Hotelling's Paradox"

This paradox/puzzle asks why businesses who are trying to "stand out" from their competitors often times end up acting very similar to their competitors (e.g. locating right next to each other, etc.).

Oligopoly

This term refers to a market structure in which there exists a small number of large firms that each command a significant percent of the overall market. Significant barriers to entry make the entry of new competing firms difficult. In this market structure, each firm's control over their price depends on whether the firms are able to act together (collude) or not. Examples -- commercial airlines, computer hardware manufacturers, appliance manufacturers, oil refining, steel, etc.

Perfect Oligopoly

This type of oligopoly is said to exist when the firms produce identical/standardized products (e.g. steel industry, copper industry, etc.).

Imperfect Oligopoly

This type of oligopoly is said to exist when the firms produce somewhat differentiated products (e.g. appliance manufacturers, automobile manufacturers, etc.)

Collusion

This exists when firms are acting together by setting the same prices, controlling production levels, etc. in order to act like a "monopoly." Many forms of this behavior are illegal in the U.S. (e.g. cartels, price fixing, etc.), but this behavior is often difficult to prove. In addition, this behavior often fails because individuals have a personal incentive to try to "cheat" away from the collective agreement in order to benefit themselves.

Price Leadership

A form of collusion in which the industry leader sets the price for their product and the other firms in the industry follow along.

Cartel

A group of firms that formally colludes, jointly setting price and output.

Game theory

Analyzes oligopolistic behavior as a complex series of strategic moves and reactive countermoves among rival firms.