Chapter 10: Concise

Monopolistic Competition

  • Characteristics:
    • Many small sellers
    • Differentiated products with close substitutes
    • Easy entry and exit
  • Elastic Demand Curve: More elastic than monopoly due to numerous substitutes.
  • Short Run Equilibrium:
    • If profit (π) > 0, then price (Pm) > average total cost (ATC).
    • Entry of new firms decreases Pm due to increased substitutes.

Long Run Equilibrium

  • Equilibrium Condition: π = 0 ➔ Pm = SRATC = LRAC; Pm > MR = SRMC = LRMC at Qm.

Comparison: Monopolistic vs Perfect Competition

  • No deadweight loss (DWL) in perfect competition; DWL present in monopolistic competition.

Oligopoly

  • Characteristics:
    • Few sellers (n < 10)
    • Homogeneous or differentiated products
    • Difficult entry
  • Examples:
    • Auto: GM, Ford, Chrysler
    • Broadcasting: ABC, CBS, NBC, FOX
  • Economies of Scale: More than perfect and monopolistic competition, less than natural monopoly.

Mutual Interdependence

  • Action-Reaction Dynamics: Firm profitability depends on actions of competitors.
  • Non-Price Competition: Firms differentiate products (e.g., quality, service) rather than just pricing.

Price Leadership and Cartels

  • Price leadership allows largest firms to set low prices, often illegal in the US.

Kinked Demand Curve

  • Price Decrease: Other firms follow; demand becomes inelastic.
  • Price Increase: Other firms do not follow; demand becomes elastic.

Game Theory

  • Elements: Players, strategies, payoffs.
  • Equilibrium: L-Dominant Strategy leads to inefficient equilibrium.
  • Prisoner's Dilemma: Dominant strategy leads to lower combined payoffs than cooperative strategy.

Comparison of Market Structures

  • Market Structures Summary:
    • Perfect Competition: Large sellers, homogeneous products, easy entry; price takers.
    • Monopoly: One seller, unique products, impossible entry; price makers.
    • Monopolistic Competition: Many sellers, differentiated products, easy entry; price makers.
    • Oligopoly: Few sellers, homogeneous or differentiated products, difficult entry; price makers.