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Chapter 26 & 27: Monopolistic Competition and Oligopolies

Chapter 26 & 27: Monopolistic Competition and Oligopolies. Principles of MicroEconomics: Econ102. Monopolistic Competition and Oligopoly. Monopolistic Competition: A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.

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Chapter 26 & 27: Monopolistic Competition and Oligopolies

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  1. Chapter 26 & 27: Monopolistic Competition and Oligopolies Principles of MicroEconomics: Econ102

  2. Monopolistic Competition and Oligopoly Monopolistic Competition: A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products. Oligopoly: A market structure in which a small number of firms compete.

  3. Demand and Marginal Revenue at a Starbucks Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

  4. Demand & Marginal Revenue Curves for a Monopolistically Competitive Firm

  5. Maximizing Profit in a Monopolistically Competitive Market

  6. How Does Entry of New Firms Affect the Profits of Existing Firms?

  7. Is Zero Economic Profit Inevitable in the Long Run? A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

  8. Allocative & Productive Efficiency Allocative Efficiency: The situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost. Productive Efficiency: The situation where every good or service is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of average total cost.

  9. Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

  10. Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition Excess Capacity under Monopolistic Competition The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where MR=MC, and where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

  11. Oligopolies

  12. Economies of Scale Help Determine the Extent of Competition in an Industry Oligopolies & Economies of Scale as a Barrier to Entry

  13. Oligopolies & Barriers to Entry • In addition to economies of scale, other barriers to entry include: • Ownership of a key input • Government–Imposed Barriers • Patent: • The exclusive right to a product for a period of 20 years from the date the product was invented.

  14. Using Game Theory to Analyze Oligopoly Game theory: The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.

  15. A Duopoly Game A Duopoly Game: Price Competition Between Two Firms Payoff matrix: A table that shows the payoffs that each firm earns from every combination of strategies by the firms. Collusion: An agreement among firms to charge the same price, or to otherwise not compete. Dominant Strategy: A strategy that is the best for a firm, no matter what strategies other firms use. Nash equilibrium: A situation where each firm chooses the best strategy, given the strategies chosen by other firms.

  16. Firm Behavior and the Prisoner’s Dilemma Cooperative Equilibrium: An equilibrium in a game in which players cooperate to increase their mutual payoff. Non-cooperative Equilibrium: An equilibrium in a game in which players do not cooperate but pursue their own self-interest. Prisoners’ Dilemma: A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off.

  17. Is Advertising a Prisoner’s Dilemma for Coca-Cola and Pepsi? If Coca-Cola wants to maximize profits, will it advertise? Explain. If Pepsi wants to maximize profits, will it advertise? Explain. Is there a Nash Equilibrium to this advertising game? If so, what is it?

  18. Cartels: The Case of OPEC Cartel: A group of firms that colludes by agreeing to restrict output to increase prices and profits. Does a cartel guarantee that collusion would be successful?

  19. Cartels: The Case of OPEC Does a cartel guarantee that collusion would be successful? The equilibrium of this game will occur with Saudi Arabia producing a low output and Nigeria producing a high output.

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