Podcast
Questions and Answers
What characterizes a market that is classified as monopolistic competition?
What characterizes a market that is classified as monopolistic competition?
- Firms engage in collusion to set prices.
- Firms have significant barriers to entry.
- Firms sell differentiated products that are substitutes. (correct)
- Firms produce identical products without any differentiation.
In a monopolistically competitive market, what happens in the long run with respect to firm profits?
In a monopolistically competitive market, what happens in the long run with respect to firm profits?
- Firms will engage in illegal price fixing.
- Firms make continuous profits indefinitely.
- Firms will experience increasing profits over time.
- Firms will eventually earn zero profit. (correct)
What effect does firm entry have on the demand curve of an existing firm in monopolistic competition?
What effect does firm entry have on the demand curve of an existing firm in monopolistic competition?
- The demand curve shifts downward. (correct)
- The demand curve remains unchanged.
- The demand curve becomes perfectly elastic.
- The demand curve shifts inward to the left.
How does the price set by a monopolistically competitive firm compare to its marginal cost in the short run?
How does the price set by a monopolistically competitive firm compare to its marginal cost in the short run?
Which of the following markets is an example of monopolistic competition?
Which of the following markets is an example of monopolistic competition?
What is one key feature that distinguishes oligopoly from monopolistic competition?
What is one key feature that distinguishes oligopoly from monopolistic competition?
What is the condition for achieving Cournot equilibrium?
What is the condition for achieving Cournot equilibrium?
What is the implication of differentiated products in a monopolistic competition market?
What is the implication of differentiated products in a monopolistic competition market?
What happens to a firm’s market share in monopolistic competition as new competitors enter the market?
What happens to a firm’s market share in monopolistic competition as new competitors enter the market?
What does Firm 1's reaction curve indicate?
What does Firm 1's reaction curve indicate?
What is the total quantity produced at Cournot equilibrium based on the given example?
What is the total quantity produced at Cournot equilibrium based on the given example?
In the case of collusion, what is the total quantity profit-maximized for both firms?
In the case of collusion, what is the total quantity profit-maximized for both firms?
In the reaction curve equations, what does the term 15 represent?
In the reaction curve equations, what does the term 15 represent?
If Firm 1's marginal revenue is expressed as $MR_1 = 30 - 2Q_1 - Q_2$, what happens at equilibrium?
If Firm 1's marginal revenue is expressed as $MR_1 = 30 - 2Q_1 - Q_2$, what happens at equilibrium?
What is the marginal cost for both firms in this Cournot model?
What is the marginal cost for both firms in this Cournot model?
When two firms collude and share profits equally, how much will each produce?
When two firms collude and share profits equally, how much will each produce?
What typically characterizes the price behavior in monopolistic competition compared to perfect competition?
What typically characterizes the price behavior in monopolistic competition compared to perfect competition?
Which of the following best describes the efficiency of markets characterized by monopolistic competition?
Which of the following best describes the efficiency of markets characterized by monopolistic competition?
What effect does the presence of many firms in a monopolistically competitive market have on individual firms' monopoly power?
What effect does the presence of many firms in a monopolistically competitive market have on individual firms' monopoly power?
Why might monopolistic competition not be deemed socially undesirable?
Why might monopolistic competition not be deemed socially undesirable?
How do demand curves in monopolistic competition typically differ from those in perfect competition?
How do demand curves in monopolistic competition typically differ from those in perfect competition?
Which combination of elasticity values indicates strong competition in the markets for colas and coffee?
Which combination of elasticity values indicates strong competition in the markets for colas and coffee?
What is the primary benefit of monopolistic competition mentioned in the content?
What is the primary benefit of monopolistic competition mentioned in the content?
What is typically observed about entry and profits in monopolistically competitive markets?
What is typically observed about entry and profits in monopolistically competitive markets?
What characterizes an oligopolistic market?
What characterizes an oligopolistic market?
What is emphasized in the Nash Equilibrium within an oligopolistic market?
What is emphasized in the Nash Equilibrium within an oligopolistic market?
Which model is used to study oligopoly behavior regarding homogeneous goods?
Which model is used to study oligopoly behavior regarding homogeneous goods?
How does a firm's output decision change in response to its competitor's expected output in the Cournot model?
How does a firm's output decision change in response to its competitor's expected output in the Cournot model?
What happens when firms in an oligopoly choose to collude?
What happens when firms in an oligopoly choose to collude?
In a duopoly, what is the primary focus of the Cournot model?
In a duopoly, what is the primary focus of the Cournot model?
What defines a reaction curve in the context of oligopoly?
What defines a reaction curve in the context of oligopoly?
Which industry is typically considered an example of oligopoly?
Which industry is typically considered an example of oligopoly?
Flashcards
Monopolistic Competition
Monopolistic Competition
A market structure where many firms compete by selling differentiated products, with free entry and exit. Examples include toothpaste brands, restaurants, and clothing stores.
Oligopoly
Oligopoly
A market with only a few firms competing, making it difficult for new firms to enter. Examples include airlines, car manufacturers, and mobile phone companies.
Price Competition
Price Competition
The process of adjusting prices in an oligopoly, where firms consider competitors' reactions.
Cournot Model
Cournot Model
A model where firms compete by setting production quantities, and the market price is determined by the total output.
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Short-run Equilibrium in Monopolistic Competition
Short-run Equilibrium in Monopolistic Competition
In the short run, a monopolistically competitive firm can earn profits because it has market power due to product differentiation.
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Long-run Equilibrium in Monopolistic Competition
Long-run Equilibrium in Monopolistic Competition
In the long run, profits attract new firms, increasing competition and driving prices down until firms earn zero economic profit.
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Collusion
Collusion
A situation where firms in an oligopoly collude to set prices or output levels, acting like a monopoly.
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Competition in an Oligopoly
Competition in an Oligopoly
The situation where firms in an oligopoly compete aggressively, leading to lower prices and potentially lower profits.
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Nash Equilibrium
Nash Equilibrium
A set of strategies where each company acts in its best interest, assuming its rivals' actions stay constant.
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Reaction Curve
Reaction Curve
The relationship between a firm's optimal output and the anticipated output of its competitor.
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Duopoly
Duopoly
A market with two competing firms.
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Game Theory
Game Theory
The strategic interaction between firms in an oligopoly, analyzed using mathematical models.
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Competition Game
Competition Game
Firms compete in an oligopoly by lowering prices or increasing output to gain market share.
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Perfect competition
Perfect competition
A market structure with many firms, identical products, perfect information, and free entry and exit. Price is determined by supply and demand.
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Consumer surplus
Consumer surplus
The difference between the price a consumer is willing to pay for a product and the price they actually pay. Under perfect competition, this is zero.
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Producer surplus
Producer surplus
The difference between the price a seller is willing to accept for a product and the price they actually receive. Under perfect competition, this is zero.
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Deadweight loss
Deadweight loss
The loss of economic welfare that occurs when the price of a product exceeds its marginal cost. It's represented by the area between the demand curve and the marginal cost curve.
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Monopoly power
Monopoly power
The ability of a firm to set its price above marginal cost. It's higher in monopolistic competition than perfect competition.
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Cournot Equilibrium
Cournot Equilibrium
The point where the reaction curves of two competing firms intersect, resulting in a stable output level for both.
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Competitive Equilibrium in Cournot Model
Competitive Equilibrium in Cournot Model
The price and output level where firms choose their outputs independently, leading to a lower total output and higher price compared to collusion.
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Collusion in Cournot Model
Collusion in Cournot Model
A scenario where firms cooperate to maximize joint profits by jointly setting output levels and dividing the market.
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Collusive Output in Cournot Model
Collusive Output in Cournot Model
The profit-maximizing output level when firms collude in a Cournot model.
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Market Share under Collusion
Market Share under Collusion
The output level chosen by each firm in a Cournot model when they collude and split the market equally.
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Deadweight Loss in Cournot Model
Deadweight Loss in Cournot Model
The difference between the collusive output and the competitive output in a Cournot model, indicating the loss of efficiency due to competition.
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Oligopoly I
- Oligopoly is a market structure where a few firms dominate the market, and entry of new firms is difficult.
- Firms in oligopolies may compete with each other or collude.
- Different behaviors, such as competition or collusion, will result in different outcomes for firms and markets.
- Game theory helps to understand the behavior of firms in oligopolistic markets.
- A Nash equilibrium is a set of strategies where each firm does the best it can given the actions of its competitors.
Monopolistic Competition
- Monopolistic competition is a market where firms produce differentiated products.
- Firms can enter and exit the market freely.
- Firms' products are close, but not perfect, substitutes.
- There are significant cross-price elasticities of demand, meaning products are substitutable, but demand curves are downward sloping.
- Examples include toothpaste brands, restaurants, hair salons.
Monopolistic Competition: Short Run
- In the short run, firms may earn economic profits if the price exceeds average cost, due to the differentiated product and firm's market share
- The yellow-shaded rectangle in the diagram illustrates the economic profits.
Monopolistic Competition: Long Run
- In the long run, new firms enter the market attracted by profits, this reduces the market share and shifts the demand curve downward.
- The price falls to average cost as new competition is faced.
- In the long-run equilibrium, firms earn zero economic profit, although price still exceeds marginal cost.
Monopolistic Competition and Efficiency
- Under monopolistic competition, prices usually exceed marginal cost, leading to a deadweight loss represented by a yellow area in the graph.
- There is an inefficiency in the market from downward sloping demands.
- Gains from product diversity may exceed the inefficiency costs caused by downward sloping demands.
Oligopoly in Colas and Coffee
- The market for soft drinks and coffee feature monopolistic competition.
- Various brands have slightly different characteristics.
- The cross-price elasticities of demand for these products are significant.
Oligopoly: Cournot Model
- Firms produce a homogenous good, treating competitor output as fixed.
- All firms decide simultaneously how much to produce.
- Firms' output is a function of what they think their competitors will produce.
- A reaction curve shows profit-maximizing output for each firm, given its forecast of competitors' output.
- The intersection of reaction curves represents the Cournot Equilibrium, where firms' predictions are correct.
Cournot Model: Example of Competition
- Two identical firms face a linear market demand.
- Marginal costs are zero.
- Firms solve for their reaction curves and Cournot Equilibrium points.
- Equilibrium results in production quantity and market price that differ from the market price and production quantity if a monopoly.
Cournot Model: Example of Collusion
- Firms collude and set production quantity as a joint maximization point to enhance profit margin.
- Using a shared-revenue maximizing market approach, firms determine equilibrium quantity and market price.
Cournot Model: Compared using Monopoly Diagram
- A diagram illustrating the relationship between the price, quantity, and corresponding total revenues generated in different market forms (i.e., Monopoly, Cournot equilibrium, and Perfect Competition).
Reading
- Students are required to read from Pindyck & Rubinfeld (2015) for chapter 12 on Microeconomics.
- Optional reading is available for innovation and competition in the smartphone industry and Apple/Samsung smartphone sales.
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