ECON 208 Chapter Notes - Chapter 11: Monopolistic Competition, Concentration Ratio, Imperfect Competition

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Chapter 11 - Imperfect Competition and Strategic Behaviour
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 (market power).
Concentration Ratio measures economic power in an
industry and shows the market shares of the largest four or
eight producers
Differentiated Product a group of commodities that are
similar enough that all of them do not have to be sold at the
same price
Price Setter a firm that faces a negative-sloped DC for its
product - it chooses which price to set
Excess-Capacity Theorem the property of long-run
equilibrium in monopolistic competition that firms produce on
the falling portion of their long-run average cost curves, that
results in excess capacity
Oligopoly an industry that contains two or more firms, at least
one of which produces a significant portion of the industry’s
total output, that compete actively with each other
Strategic Behaviour behaviour designed to take account of
the reactions of one’s rivals to one’s own behaviour
Non-Cooperative Outcome an industry outcome reached
when firms maximize their own profit without cooperating with
other firms
Game Theory the theory that studies decision making in
situations in which one player anticipates the reactions of other
players to its own actions
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
Collusion an agreement among sellers to act jointly in their
common interest. May be overt or covert, explicit or tacit
Concentration ratio - Defining a market
with reasonable
accuracy is difficult
- Sometimes market
is much smaller than
whole industry or
much larger than
whole country
- Globalization: a lone
firm in one Canadian
industry may be
competing with
foreign firms
operating in Canada
Imperfect Competition
-Not monopoly
-Not perfect competition
-Firms choose their products
sell differentiated products
-Firms choose their prices
Price setters: let demand determine sales
changes in market conditions are signalled by changes
int he firm’s sales
Non-price competition
Imperfectly competitive firms typically engage in behaviour that
is absent in either monopoly or perfect competition
-spend large sums of money on advertising
-engage in non-price competition
-create entry barriers to prevent erosion of current pure
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