Chapter 22

List characteristics of monopolistic competition

Many firms, free entry. Differentiate product.

Characteristics of an oligopoly

Few firms, limited entry

Strategetic behavior

firm behavior that takes into account the market power and reactions of other firms in the industry

2 reasons producers want to differentiate their products

-maximize profit
-can be of value to consumers looking to match their tastes and producer may be able to suit their niche

Product differntiation

when sellers in a monopolistic competition try to differentiate between their products and those of their competitors

Phenomena that can be explained by product differentiation

-Interindustry trade
-Inraindustry trade
-advertising
-need for consumer information services

Why do some economists believe advertising is wasteful?

It only changes PERCEPTIONS of two similar products, rather than actual differences

Interindustry trade

Trade between countries in goods from different industries

Intraindustry trade

trade made between countries in goods from the same industry

4 ways in which products can be differentiated

-Physical characteristics
-Service after sale
-location
-time

Invented the model of monopolistic competition

Edward Chamberlain

This curve shows monopolistic competition

downward sloping demand curve

In the short run, a monopolistically competitive firm can earn what types of profit?

Positive, negative, or zero profit

When a new firm enters a monopolistic competition's industry, the curve moves how?

move to the left

When a firm leaves MC's industry, what happens to the remaining firm's demands?

Increases; its one less firm to take away business

What info does oligopolies use to make decisions?

other firms' actions

Game theory

branch of applied mathematics with many uses in economics, including the analysis of the interaction of firms that take others' actions into account

Prisoner's dilemma

game in which individual incentives lead to a nonoptimal, noncooperative outcome. If players choose to cooperate, they achieve the best outcome.

The cooperative outcome for the prisoner's dilemma

both shut up

Cournot competition

when oligopolies compete in quantities

Bertrand Competition

when oligopolies compete in prices

Collusion

when firms combine and maximize profits and compete and interact over a long period of time

The difference between explicit and tacit collusion is what?

communication

How is MC like competition and how is it like a monopoly?

Its like competition b/c firms compete and there is free entry/exit. Its like monopolies b/c both have downward sloping demand curves which=deadweight loss and less efficiency.