Questions and Answers
Which of the following are characteristics of a company in perfect competition? (Select all that apply)
What are the main characteristics of a company in a monopoly?
Single seller, price maker, has control of the market.
Oligopolies experience high advertising and selling costs.
True
What does collusion in an oligopoly mean?
Signup and view all the answers
In which market structure do McDonald's, Starbucks, and Dunkin Donuts compete?
Signup and view all the answers
What are barriers to entry in a monopoly?
Signup and view all the answers
What types of mergers are there?
Signup and view all the answers
Define product differentiation.
Signup and view all the answers
Price takers operate in monopolistic competition.
Signup and view all the answers
What is market segmentation?
Signup and view all the answers
Which of the following describes predatory pricing?
Signup and view all the answers
What is the meaning of price rigidity?
Signup and view all the answers
What is the difference in economic profits between perfect competition and monopoly?
Signup and view all the answers
What is the goal of antitrust laws?
Signup and view all the answers
Define game theory in the context of oligopoly.
Signup and view all the answers
Match the following terms with their descriptions:
Signup and view all the answers
Study Notes
Characteristics of Perfect Competition
- Many buyers and sellers act as price takers.
- Firms sell identical (homogeneous) products.
- Easy market entry and exit with no significant barriers.
Characteristics of Monopoly
- A single seller controls the market and acts as a price maker.
- Example: U.S. Postal Service faces competition but remains dominant in standard mail processing.
Characteristics of Oligopolies
- Firms are interdependent in decision-making processes.
- High costs associated with advertising and selling.
- Potential for price rigidity and stickiness in the market.
Collusion in Oligopoly
- Firms collaborate on pricing and business strategies to stabilize profits.
Market Competition of Fast Food Chains
- McDonald's, Starbucks, and Dunkin’ Donuts compete in a monopolistically competitive market.
Nature of Cartels
- A cartel is a group of businesses that operate as a single entity to control market output and pricing.
- Example: OPEC manages oil production and pricing through collective agreements.
Barriers to Entry by Market Structure
- Monopoly: faces barriers like patents, exclusive licenses, and tariffs.
- Perfect Competition: no significant barriers to entry.
- Oligopoly: includes government regulation and control over key inputs.
Types of Mergers
- Horizontal: firms in the same industry merge (e.g., two hotels).
- Vertical: firms from different supply chain stages merge (e.g., a hotel merging with a mattress producer).
- Conglomerate: firms in unrelated sectors merge (e.g., a hotel with a car manufacturer).
Product Differentiation
- Firms emphasize unique product features to create brand identity, based on real or perceived differences.
Market Segmentation, Pricing Power, and Collusion
- Market segmentation involves dividing consumers into distinct groups for targeted marketing strategies.
- Pricing power refers to the ability of a firm to influence its product price in response to demand.
- Collusion represents illegal agreements between competitors to manipulate market practices.
Definition of Oligopoly
- A market structure characterized by a few firms that dominate production, exhibiting mutual interdependence.
Price Takers vs. Price Makers
- Price takers: operate in perfectly competitive markets where they accept market prices.
- Price makers: operate in monopolistic or oligopolistic markets, able to influence their prices.
Types of Oligopolists
- Firms can either differentiate their products or not, found in industries like airlines and consumer goods.
Number of Firms in Different Markets
- Perfect Competition: infinite number of firms.
- Monopolistic Competition: one firm dominates.
- Oligopolistic Competition: a small number of firms.
Barriers to Entry and Market Types
- Perfect competition: easy entry.
- Monopolistic competition: legal barriers restrict entry.
- Oligopoly: significant costs and challenges for new entrants.
Antitrust Laws
- Aim to prevent monopolistic practices and promote competition.
- Address predatory pricing, price discrimination, and tie-in sales.
Examples of Price Discrimination
- Examples include varying prices for utility services, airline tickets, and discount offers.
Conditions for Price Discrimination
- Requires market power, effective market segmentation, and difficulty reselling products.
Market Segmentation Concepts
- Includes dividing consumers into categories that can be targeted with distinct marketing strategies.
Price Effect in Monopolistic Competition
- To sell additional units, monopolists must lower prices, impacting total revenue negatively.
Definition of Monopolistic Competition
- A market structure with many producers of differentiated products, allowing some degree of market power.
Price Rigidity and Stickiness
- Reflects reluctance of firms to change prices in response to market conditions, resulting in price stability.
Profit Maximization in Firms
- Determined by analyzing total revenue, average revenue, and marginal revenue to identify optimal pricing and output.
Role of Advertising
- Shifts demand curves and raises consumer awareness, sometimes utilizing celebrity endorsements.
Cost Dynamics in Industries
- Constant costs: inputs remain stable as production expands.
- Increasing costs: rising expenses as industry output increases.
- Decreasing costs: reduced costs as industry expands production capabilities.
Efficiency Concepts
- Productive efficiency: firms minimize production costs.
- Allocative efficiency: production aligns with consumer preferences.
Price Determination Economics
- Prices are influenced by competition rather than strictly by production costs.
Examples of Perfect Competition
- Notable markets include airline fares, online marketplaces, and agricultural products, operating on competitive pricing.
Elements of Perfectly Competitive Markets
- Features perfect knowledge availability, no entry barriers, homogeneous products, and the price-taking firm behavior.
Short Run Profits and Losses
- Firms may not always achieve profits by maximizing output; they must also consider variable costs.
Long Run Equilibrium Implications
- Profitable industries attract new firms, leading to a competitive adjustment that eliminates economic profits.
Long Run Supply Conditions
- Industry output changes can affect cost structures, with industries categorized as constant, increasing, or decreasing cost.
Demand and Marginal Revenue in Monopoly
- Demand curves are downward sloping, limiting simultaneous control over price and quantity by monopolists.
Economic Profits Contrast
- In perfect competition, short-term profits attract new entrants, while monopolies can maintain long-term profits due to barriers.
Monopoly and Welfare Loss
- Monopolies can cause inefficiencies, leading to higher prices and reduced output compared to competitive markets.
Short Run Equilibrium in Monopolistically Competitive Markets
- Economic profits and marginal revenues define firm performance and pricing strategies.
Long Run Equilibrium Adjustments
- New entrants in an economic profit scenario will drive demand elasticity and reduce existing firms' profits.
Monopolistic vs. Perfect Competition
- Key differences include market power, potential for excess capacity, and productive efficiencies across structures.
Long Run Dynamics of Oligopoly
- Firms may charge higher prices and produce lower outputs than socially optimal, impacting overall welfare.
Division of Profits in Oligopoly
- Profit sharing relies on factors like bargaining power, financial strength, and market perception.
Game Theory in Oligopoly
- Firms strategize to mitigate competitive damage through alternative actions, often informed by rival moves.
Cooperative vs. Non-Cooperative Games
- Cooperative games involve collusion between firms, while non-cooperative games feature independent price-setting.
Prisoner's Dilemma Concept
- Illustrates the challenges faced by non-colluding oligopolists while navigating competitive strategies.
Payoff Matrix in Game Theory
- Describes outcomes of strategies in games, showcasing the consequences of cooperation or betrayal among players.
Long Term Strategies in Oligopoly
- Interactions are often repeated; firms adopt strategies like tit-for-tat to maintain competitive advantage.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge on the characteristics of market structures in economics, including perfect competition and monopoly. These flashcards are designed to help reinforce your understanding of key concepts and definitions. Ideal for students preparing for their economics exams.
