Monopolistic Competition and Oligopoly Flashcards

Questions and Answers

What are the four characteristics of monopolistic competition?

Relatively large number of sellers, differentiated products, freed of entry and exit, and advertising is prevalent.

What is the market share characteristic of firms in monopolistic competition?

Each firm has a small market share, and no one firm dominates the market.

What are differentiated products in monopolistic competition?

Product attributes, physical or qualitative differences, brand names and packaging, service, and location.

What is the role of advertising in monopolistic competition?

Consumers are made aware of product differences through advertising, also known as nonprice competition. Signup and view all the answers

What happens to short run profits in monopolistic competition?

The demand curve is more elastic and the marginal revenue line falls below the demand curve. Signup and view all the answers

What are short run losses in monopolistic competition?

The average cost will be above the demand curve, making the cost higher than the price. Signup and view all the answers

What occurs in the long run for firms in monopolistic competition?

Firms will enter and compete away the profits, reaching normal profits over time. Signup and view all the answers

What does it mean when average cost runs along the demand curve in monopolistic competition?

It means the cost and price will be equal, resulting in a normal/economic profit of zero. Signup and view all the answers

What must firms do to be successful in the long run in monopolistic competition?

Restart the short run by increasing demand or lowering costs. Signup and view all the answers

Are monopolistic competition firms efficient?

No, because the price will never hit the productive or allocative efficiency. Signup and view all the answers

What defines productive efficiency?

It is where the marginal cost intersects the average cost. Signup and view all the answers

What defines allocative efficiency?

It is where marginal cost intersects the demand curve. Signup and view all the answers

What is the gap between quantity in the long run and quantity that is productively efficient called?

Excess capacity. Signup and view all the answers

What are the characteristics of an oligopoly structure?

Few large producers, differentiated or similar products, barriers to entry, and mutual interdependence. Signup and view all the answers

How does the number of producers in an oligopoly compare to pure competition and monopoly?

Fewer firms than pure competition but more firms than a monopoly. Signup and view all the answers

What does it mean when products in an oligopoly are differentiated or similar?

Products can be very similar but are differentiated through advertising and marketing. Signup and view all the answers

What are the barriers to entry in an oligopoly?

The barriers to entry are similar to that of a monopoly. Signup and view all the answers

How do oligopolies control price?

Oligopolies are price makers, but they consider rivals' reactions before changing prices. Signup and view all the answers

What does it mean that mergers are prevalent in oligopoly structures?

Firms combine to increase monopoly power, referred to as the 'urge to merge'. Signup and view all the answers

What is game theory in the context of oligopoly?

Firms have to watch their rivals and make decisions based on each other's actions. Signup and view all the answers

What is a payoff matrix?

A representation of possible outcomes based on pricing decisions of firms. Signup and view all the answers

Study Notes

Monopolistic Competition

Characterized by a relatively large number of sellers, differentiated products, freedom of entry and exit, and prevalent advertising.
Each firm holds a small market share; no firm dominates, ensuring independence without collusion.
Differentiation of products includes physical attributes, brand names, service, and location, enhancing competitive edge.
Advertising plays a crucial role in making consumers aware of product differences, classified as non-price competition.

Short and Long Run in Monopolistic Competition

Short run profits occur when demand and marginal revenue curves allow average costs to fall below demand.
Short run losses arise when average costs exceed demand, indicating higher costs than prices.
Long run adjustments lead to zero economic profits as firms enter the market to compete away excess rents.
In the long run, the average cost aligns with the demand curve, reflecting normal profits.
To sustain long-run success, firms must restart the short run by enhancing demand or reducing costs.

Efficiency in Monopolistic Competition

Monopolistic competition is inherently inefficient; prices do not reach productive or allocative efficiency.
Productive efficiency is achieved when marginal cost equals average cost.
Allocative efficiency occurs when marginal cost aligns with the demand curve.
The difference between long-run output and productive efficiency is termed excess capacity.

Oligopoly Structure

Features few large producers, can offer either differentiated or similar products, and presents significant barriers to entry.
Control over pricing exists, with firms being mutually interdependent, reacting to rivals’ pricing strategies.
Mergers are common in oligopolies, driven by the desire to enhance market power.

Oligopoly Characteristics

Few large producers result in fewer firms than pure competition but more than a monopoly.
Products are often advertised to create differentiation, as seen with brand examples like Tampons.
Barriers to entry in oligopolies resemble those in monopolistic markets.
Firms act as price makers, carefully considering competitor reactions to changes in pricing or output.

Game Theory and Payoff Matrix

Game theory emphasizes the strategic behavior of firms, considering rivals' actions in decision-making.
Payoff matrix illustrates potential outcomes, showcasing profits based on high or low pricing strategies from competing firms.

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Test your knowledge on the characteristics of monopolistic competition and the distinctions of oligopoly with these flashcards. These concise definitions and concepts will help you understand key economic principles effectively.