Unit 4: Imperfect Competition

• Characteristics of Perfect Competition:

  • Large number of sellers
  • Identical products
  • Easy to enter & exit
  • Firms are price takers
• Characteristics of Monopolistic Competition:

  • Large number of sellers
  • Differentiated products
  • Easy to enter market
  • A lot of non-price competition
  • Some control over price
• Characteristics of an Oligopoly:

  • A few large firms
  • High barriers
  • Control over price
  • Identical or differentiated products
• Excess Capacity: The gap between the minimum ATC output & the profit maximizing output.

  
• Cartel Model: a combination of firms that acts as if it were a single firm; shared monopoly;
• Normal profit: the amount the owners of business would have received in the next-best alternative
• Monopoly: a market structure in which one firm makes up the entire market
• Oligopoly: a market structure in which there are only a few firms and firms explicitly take other firms' likely response into account
• Natural monopoly: an industry in which a single firm can produce at a lower cost than can two or more firms
• Dominant strategy: a strategy that is preferred by a player regardless of the opponent's move
• Game theory: formal economic reasoning applied to situations in which decisions are interdependent
• Nash Equilibrium: a set of strategies for each player in the game in which no player can improve his or her payoff by changing strategy unilaterally
• Barriers to Entry: anything that makes it difficult for a new firm to be formed in a market. Common ones include the government, startup cost, and economies of scale
• Dead Weight Loss: the loss of consumer and producer surplus from a tax; measures the inefficiency caused from a market distortion, such as a tax levied on an item or a minimum price law
• Product Differentiation: the goods that are sold aren't homogeneous, as in perfect competition; they are differentiated slightly
• Kinked Demand Curve: theory about oligopoly and monopolistic competition, it was an initial attempt to explain sticky prices
• Fair return price: a rational and unbiased estimate of the market price of something, using such factors as cost, supply and demand and risk characteristics
• Socially optimal price: the price where firm does not retain any profits and all the benefits are passed onto society