Monopolistic Competition, Oligopoly, & Game Theory Notes

Monopolistic Competition: Market structure with many firms selling similar, yet differentiated products.
Product Differentiation: Variations in products to distinguish them from competitors (e.g., branding, quality).
Oligopoly: Market structure with a few significant firms that hold substantial market power.
Mutual Interdependence: Firms in an oligopoly must consider rivals' actions when setting prices and output.
Cartel: A formal agreement between firms to collude on price and output to maximize profits.
Kinked Demand Curve: A model explaining price stability in an oligopoly.
Game Theory: Study of strategic decision-making among firms.
Simultaneous-Move Game: Players make decisions at the same time, without knowledge of the other player's choice.
Sequential-Move Game: Players make decisions one after another, with knowledge of previous actions.
Nash Equilibrium: A situation where players choose optimal strategies considering the strategies of others.
Dominant Strategy: A strategy that yields a higher payoff for a player, regardless of what others do.
Prisoner’s Dilemma: A situation in which individuals acting in their own self-interest do not achieve the best overall outcome.
Trigger Strategies and Tit-for-Tat Strategies: Approaches to repeated games to encourage cooperation or punish defection.

Many buyers and sellers are present.
Differentiated Products: Each firm offers a product that varies from its competitors.
Low Barriers: Minimal barriers to entry and exit from the market.
Normal Profit: Firms do not earn long-run economic profits due to competition.
Some Price Control: Firms have limited power to set prices above marginal costs (P > MC).

Monopolistically competitive firms maximize profits by setting marginal revenue (MR) equal to marginal cost (MC).
Short Run vs Long Run:
- Short Run: Firms can earn profits.
- Long Run Adjustments: Entry of new firms leads to zero economic profit (P = ATC).

Few Firms: Market is dominated by a small number of firms.
Interdependent Decision Making: Actions of one firm significantly influence others.
Substantial Barriers: High costs associated with entering the market (e.g., capital-intensive industries).
Potential for Long Run Economic Profit: Due to the ability to set prices above marginal costs.

Cartel: Agreement among firms to limit competition (e.g., OPEC).
Effects of Cartels: Limit overall supply to raise prices and profits through coordinated actions.

Each player adopts a strategy based on the expected strategies of others, leading to a situation where no player can benefit from unilaterally changing their strategy.

Dominant Strategy: Occurs when one strategy is best regardless of rivals’ actions.
Prisoner’s Dilemma: Reveals how individual rationality can lead to a collectively worse outcome (e.g., firms failing to cooperate).

Simultaneous-Move Games: Similar to games like rock-paper-scissors where players act without knowledge of others' moves.
Sequential-Move Games: Players take turns making moves, with the second player considering the first player's action.

Game theory applies extensively to strategic decisions in business, influencing pricing, entry decisions, advertising, and competition management.
First-Mover Advantage: In sequential games, the first player may achieve favorable outcomes by influencing subsequent moves of competitors.