1. Industrial concentration
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.
Eg1. Product differentiation is the most important characteristic of
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.
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.
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
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
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
11.In the long-run, firms in monopolistically competitive markets operate
with excess capacity because they face downward-sloping demand
12.The theory of monopolistic competition explains economic behaviour in
industries in which there are many small firms, each with some market
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
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
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
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
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
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
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