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ECON CH 11
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Key concepts: Monopolistically Competitive Firms
Long Run Equilibrium
Marginal Revenue Curve
Terms in this set (31)
The most common reason that oligopolies exist is
economies of scale
"Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point." This statement recognizes that products of monopolistically competitive firms
may be preferred by consumers, giving them monopoly power; however, consumers will seek substitutes if the price is too high, making them competitive
In monopolistically competitive markets, resources are
underallocated because long-run equilibrium occurs where price exceeds marginal cost. There might be a temptation to cheat on the collusive agreement because each firm could
increase its profit even more by secretly charging less than the agreed upon price
Monopolistically competitive firms
may realize either profits or losses in the short run, but realize normal profits in the long run. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl Index for this industry is
2,200
Shortcomings of the kinked-demand model include
a lack of explanation for how the initial price is set
The kinked-demand curve model of oligopoly is useful in explaining
why oligopolistic prices might change only infrequently
The difference between monopolistic competition and pure competition is that in comparison to pure competition, monopolistic competition has
fewer firms, product differentiation, some price control, and relatively easy but not barrier-free entry
If competing oligopolists completely ignore oligopolist X's price changes, then X's
demand curve will be more elastic than if the other oligopolists matched X's price changes
The kinked-demand curve for oligopolists assumes that rivals will
match price cuts but ignore price increases
Price collusion occurs in oligopolistic industries because
price competition can lower revenue for all firms
The kinked-demand curve model helps to explain price rigidity because
there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price
Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from
relatively easy entry
Concentration ratios
may understate the degree of competition because they ignore imported products
Oligopoly is more difficult to analyze than other market models because
of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models
In the long-run, the price charged by the monopolistically competitive firm attempting to maximize profits
will be equal to ATC
We would expect a cartel to achieve
neither allocative efficiency nor productive efficiency
As a general rule, oligopoly exists when the four-firm concentration ratio
is 40 percent or more
Suppose the Herfindahl Indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that
market power is greatest in industry C
Advertising is an important aspect of monopolistic competition and oligopoly because
brand distinction encourages consumer loyalty, increasing profits
Oligopolistic firms engage in collusion to
earn greater profits
Cartels are difficult to maintain in the long run because
individual members may find it profitable to cheat on agreements
The mutual interdependence that characterizes oligopoly arises because
a small number of firms produce a large proportion of industry output
Price leadership is legal in the United States, whereas price fixing is not. This is because price leadership is
not an agreement, whereas price fixing is
Oligopoly differs from monopolistic competition in that oligopoly
has few firms, whereas monopolistic competition has more firms
Advertising promotes efficiency and benefits consumers by
providing information about new products, increasing sales and output, and lowering average total cost
Advertising can enhance economic efficiency when it
increases consumer awareness of substitute products
In long-run equilibrium a monopolistically competitive producer achieves
neither productive efficiency nor allocative efficiency
Suppose that an industry is characterized by a few firms and price leadership. We would expect that
price would exceed both marginal cost and average total cost
Firms will enter a monopolistically competitive industry when there are
economic profits.