CIA4U Economics Chapter 6

Monopoly & Imperfect Competition

Mutual Interdependence

The relationship among oligopolists in which the actions of each business affect the other businesses

Market Share

A business’s proportion of total market sales

Kinked Demand Curve

Demand curve with two segments, one fairly flat and one steep, that is typical of rival oligopolists

Price Leadership

An understanding among oligopolists that one business will initiate all price changes in the market and the others will follow by adjusting their prices and output accordingly

Collusion

Oligopolists acting together as if they are a monopoly to eliminate competition

Cartel

A union of oligopolists who have a formal market-sharing agreement

Anti-Combines Legislation

Laws aimed at preventing industrial concentration and abuses of market power

Conspiracy

When businesses conspire or agree to fix prices, allocate markets, or restrict entry to markets

Bid-Rigging

When companies bid on contracts and arrange among themselves who will win each contract and at what price.

Predatory Pricing

Temporarily dropping a price for a product below its average cost to drive a new competitor out of business

Abuse of Dominant Position

Companies that control most of the sales in a market are not allowed to use their dominant position to engage in anti-competitive behaviour.

Merger

Combining of two companies into one.

Horizontal Merger

A combination of former rivals

Vertical Merger

A combination of a business and its supplier

Conglomerate Merger

A combination of businesses in unrelated industries

Non-price competition

Efforts to increase demand through product differentiation, advertising, or both

Product Differentiation

Efforts to make a product distinct from competitors’ products

Concentration Ratio

The percentage of total sales revenue earned by the largest businesses in the market

Four-Firm Ratio

The percentage of total sales revenue earned by the four largest businesses in the market.

• If over 50%, it’s considered an oligopoly

• If below 50%, it’s considered monopolistic competition

Industrial Concentration

Market domination by one or a few large businesses

Accounting-Profit Rate

A measure of a business’s profitability.

Formula: Accounting-Profit Rate = Accounting Profit ÷ Owner’s Equity x 100%

Average-Cost Pricing

The practice of setting price where it equals average cost

Fair rate of return

The maximum accounting-profit rate allowed for a regulated monopoly