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Ch11.doc

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Department
Economics
Course
ECO100Y5
Professor
None
Semester
Fall

Description
Ch11 1. Industrial concentration  Concentration ratios  Defining the market 2. Most firms in imperfectly competitive markets sell differentiated products. In such industries, the firm itself must choose which characteristics to give the products that it will sell 3. Differentiated product: a group of commodities that are similar enough to be called the same product but dissimilar enough that all of them do not have to be sold at the same price. 除除除除除除除除除除除除除除除除除除除除除(产品产一)以外,通常产品差异是普遍存在的。 Eg1. Product differentiation is the most important characteristic of industries called a) Perfect Monopoly. b) Perfect Differentiation. c) Differentiated Competition. d) Monopolistic Competition. 4. Price setter: a firm that faces a downward-sloping demand curve for its product. It chooses which price to set. 除除除除除除除除除除除除除除除除除除除除除除除除除除除 5. In market structures other than perfect competition, firms set their prices and then let demand determine sales. Changes in market conditions are signaled to the firm by changes in the firm’s sales. 6. Monopolistic competition: market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price. 除除除除除除除除除除除除除除除除 除1除 除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除 除2除 除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除 除除除除除除除除除除除除除除除除除除除除除 第三,厂商的生产产模比产小,因此产入和退出一个生产集产比产容易。 7. The assumptions of monopolistic competition  Each firm produces one specific brand of the industry’s differentiated product. Each firm thus faces a demand curve that, although negatively sloped, is highly elastic because competing firms produce many close substitutes.  All firms have access to the same technological knowledge and so have the same cost curves  The industry contains so many firms that each one ignores the possible reactions of its many competitors when it makes its own price and output decisions. In this respect, firms in monopolist competition are similar to firms in perfect competition  There is freedom of entry and exit in the industry. If profits are being earned by existing firms, new firms have an incentive to enter. When they do, the demand for the industry’s product must be shared among more brands. 8. Monopolistically competitive industries have a large number of firms, thus each would be relatively small. Oligopolistically competitive industries have a small number of firms, thus each would be relatively large. 9. In long-run equilibrium in monopolistic competition, goods are produced at a point where average total costs are not at their minimum, in contrast to perfect competition, where they are produced at their lowest possible cost. 10.In long run equilibrium, the firm in monopolistic competition, unlike the perfectly competitive firm, is not operating at the minimum point on its LRAC. 11.In the long-run, firms in monopolistically competitive markets operate with excess capacity because they face downward-sloping demand curves. 12.The theory of monopolistic competition explains economic behaviour in industries in which there are many small firms, each with some market power. 13.Monopolies advertise to increase consumers’ demand for their product relative to other products. Eg. 1. An important characteristic of monopolistic competition is that a) there are relatively few barriers to entry. b) firms can differentiate their products. c) products are homogeneous. d) firms do not have any control over the price of their products. Eg.2. Firms in monopolistic competition must have some degree of price- setting power since a) they must lower their price in order to sell a greater quantity. b) the price they charge is never more than the marginal cost of production. c) they offer identical products and can underbid their competitors. d) they can never earn less than normal economic profit. 14.Predictions of the theory  The short-run decision of the firm  The long-run equilibrium of the industry  The excess- capacity theorem In long-run equilibrium in monopolistic competition, goods are produced at a point where average total costs are not their minimum Excess-capacity theorem (除除除除除除除除): the property of long-run equilibrium in monopolistic competition that firms produce on the falling portion of their long-run average cost curves. This results in excess capacity, measured by the gap between present output and the output that coincides with minimum average cost. From society’s point of view, there is a tradeoff between producing more brands to satisfy diverse tastes and producing fewer brands at a lower cost per unit. 15.Oligopoly: an industry that contains two or more firms, at least one of which produces a significant portion of the industry’s total output 除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除除 除除除除: 1) 企产极少 2) 除除除除 3) 产品同产或异产 4) 产出不易 16.Strategic behaviour: behaviour designed to take account of the reactions of one’s rivals to one’s own behaviour. 17.Oligopolistic firms often make strategic choice; they consider how their rivals are likely to respond to their own actions 18.Cooperative (collusive) outcome: a situation in which existing firms cooperated to maximize their joint profits. 19.Non- cooperative outcome: an industry outcome reached when firms maximize their own profit without cooperating with other firm. 20.Game theory: the theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. 21.When game theory is applied to oligopoly, the players are firms, their game is played in the market, their strategies are their price or output decisions, and the payoffs are their profits.  A payoff matrix  Strategic behaviour Cooperative outcome Non-cooperative outcome Nash equilibrium: an equilibrium that results when each firm in an industry is currently doing the best that it can, given the current behaviour of the other firms in the industry. 22.If a Nash equilibrium is established by any means whatsoever, no firm has an incentive to depart from it by altering its own behaviour. 23.A Nash equilibrium occurs when each firm in an industry is currently doing the best that it can, given the current behavior of the other firms in the industry. 24.Nash equilibrium occurs when no individual player feels like changing strategy once the other players’ choices are revealed, which gives stability to the equilibrium. 25. 26.Types of cooperative behaviour  Explicit collusion: an agreement among sellers to act jointly in their common interest. Collusion may be overt or covert, explicit or tacit.  Tacit collusion 27.Types of competitive behaviour  Competition of market share  Innovation: there are strong incentives for oligopolistic firms to compete rather than to maintain the cooperative outcome, even when they understand the inherent risks to their joint profits. 28.The importance of entry barrier  Brand proliferation as an entry barrier The larger the numbers of differentiated products that are sold by existing oligopolists, the smaller the market share available to a new firm that is
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