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Econ Chapter 10 Notes

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Course Code
ECO 304L

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Eco Chap 10 Notes 1. Pure competition and monopoly rarely exists in actual practice a. Competitive markets are defined by homogeneous products that’s not very common b. Monopolistic Competition- many firms offer products that are different c. Oligopy- Only a few firms operate 2. Monopolistic Competition a. Monopolistic Competition- is closer to the competitive end of the spectrum and is defined by the following i. Large number of small firms. ii. Independent of competitor’s reactions iii. Entry and exit is easy iv. Products are different-product differentiation b. Product differentiation- one firm’s product is distinguished from another thorugh advertising, innovation, location and so on i. The demand curve for monopolistic competition is in between horizontal (competitive) and monopolistic (Diagonal) ii. Has a downward sloping Marginal revenue curve iii. Packaging is very important iv. ROLE OF ADVERTISING 1. Informational or persuasive 2. Persuasiveads drives costs up because there is more demand for them when one of the substitute prodducts starts doing it 3. They are moving more towards internet now then onventional media c. Price and Output i. Short Run- Like monopolists d. Comparing Monopolistic competition to Competition i. Do not run at full efficiency, slight less quantity and higher price but not as much as full monopoly ii. Price we pay for innovation and product differentiation 3. Oligopoly- large market share is controlled by a few firms a. Can sell homogeneous products or differentiated products b. Defining Oligopoly i. Few Dominate firms in industry ii. Each firm recognizes that it must take into account the behavior of its competitors 1. Mutual inrdependence iii. Significant barriers to entry 1. Huge marketing campaigns c. Cartels: Join Profit Maximization i. Cartel- collusive joint profit maximization 1. Few Firms collude (combine secretly) to operate like a monopoly 2. They are illegal ii. Most famous cartel is OPEC iii. Cartels are inherelntly unstable because of the incentive to cheat by individual members 1. Most stable with few members and similar goals and maintained by legal provisions 2. Also more stable if no nonprice competition can happen 4. Game Theory- an approach to analyzing oligopoly behavior using mathematic and simulation by making different assumptions about the players, time, level of info, stratagies and toher aspects of the game a. Types of games i. Cooperation: permit players to collude on prices, output and other variables like OPEC ii. Noncooperative: Opposite of above iii. Players: Simple games involve only 2 players, but many modern ones involve multiplayer environment
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