Characteristics of Monopolistic Competition
large number of sellers
differentiated products
some control over price
easy entry and exit
lot of non-profit competition
characteristics of oligopolies
few large producers
identical or differentiated products
high barriers to entry
control over price
mutual interdependence
use strategic pricing
game theory
the study of how people behave in stratefic situations
interdependence
when the outcome (profit) of each firm depends on the actions of the other firms in the market
duopoly
oligopoly consisting of only two firms
collusion
when sellers cooperate to raise joint profits
cartel
a group of producers that agree to restrict output in order to increase prices and thir joint profits
noncooperative behavior
when firms act in their own self-interest, ignoring the effects of their actipns on each others profits
payoff
the reward received by a player in game theory
payoff matrix
shows how the payoff to each of the participants in a two-player game depends on the action of both
The Prisoners’ Dilemma
each player has an incentive eto choose and action that benefits itself at the other players expense
dominant strategy
when it is a player’s best action regardless of the action taken by the other player
Nash Equilibrium
the result when each player in a game chooses the action that maximizes his or her payoff, given the actions of other players
antitrust policy
involves efforts by the government to prevent oligopolistic industries from becoming or behaving like monopolies
strategic behavior
when a firm attempts to influence the future behavior of other firms
tit for tat
playing cooperatively at first, then doing whatever the other player did in the previous period
tacit collusion
when firms limit production and raise prices in a way that raises each other’s profits, even though they have not made any formal agreement
price leadership
one firm sets its price first, and other firms then follow
nonprice competition
using advertising and other means to try to increase their sales
zero-profit equilibrium
each firm makes zero profit at its profit-maximizing quantity
excess capacity
firms produce less than the output at which average total cost is minimized
