Econ Test 4 Flashcards

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.