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University of Toronto Scarborough
Economics for Management Studies
Gordon Cleveland

Chapter 11 Imperfect Competition and Strategic Behaviour Notes 11.1 The Structure of the Canadian Economy Industries with Many Small Firms N about two-thirds of Canadas total annual output is produced by industries made up of firms that are small relative to the size of the market in which they sell and the PC model does quite well in explaining behaviour of some of these industries N theory of monopolistic competition was originally developed to help explain economic behaviour and outcomes in industries in which there are many small firms, each with some market power Industries with a Few Large Firms N theory of oligopoly is about industries in which there are small number of large firms, each with market power, that compete Industrial Concentration N concentration ratio : the fraction of total market sales (or some other measure of market activity) controlled by a specific number of the industrys largest firms 11.2 What is Imperfect Competition? Firms Choose Their Products N 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 N 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 Firms Choose Their Prices N administered price : a price set by the conscious decision of the seller rather than by impersonal market forces N price setter : a firm that faces a downward sloping demand curve for its product; it chooses which price to set N in market structures other than perfect competition, firms set their prices and then let demand determine sales; changes in market conditions are signalled to the firm by changes in the firms sales Non Price Competition N firms in imperfect competition behave in other ways that are not observed under either perfect competition or monopoly N first, many firms spend large sums of money on advertising N second, many firms engage in a variety of other forms of non-price competition, such as product guarantees N third, firms in many industries engage in activities that appear to be designed to hinder the entry of new firms, thereby preventing existing pure profits from being eroded by entry 11.3 Monopolistic Competition N 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 The As
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