Chapter 9 Econ Notes

Oligopoly is a market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals' actions into account when developing their own competitive strategies.

Noncooperative oligopoly models show interdependent behavior that assumes that firms pursue profit-maximizing strategies based on assumptions about rivals' behavior and the impact of this behavior on the given firm's strategies.

Cooperative oligopoly models show interdependent behavior that assumes that firms explicitly or implicitly cooperate with each other to achieve outcomes that benefit all the firms.

Kinked demand curve model. An oligopoly model based on two demand curves that assumes that other firms will not match a firm's price increases, but will match its price decreases.

Game theory. A set of mathematical tools for analyzing situations in which players make various strategic moves and have different outcomes or payoffs associated with those moves.

Dominant strategy results in the best outcome or highest payoff to a given player no matter what action or choice the other player makes.

Nash equilibrium. A set of strategies from which all players are choosing their best strategy, given the actions of the other players.

Strategic entry deterrence. Strategic policies pursued by a firm that prevent other firms from entering the market.

Limit pricing. A policy of charging a price lower than the profit-maximizing price to keep other firms from entering the market.

Predatory pricing is lowering prices below cost to drive firms out of the industry and scare off potential entrants.

Cartel is an organization of firms that agree to coordinate their behavior regarding pricing and output decisions in order to maximize profits for the organization.

Joint profit maximization. A strategy that maximizes profits for a cartel, but that may create incentives for individual members to cheat.

Horizontal summation of marginal cost curves. For every level of marginal cost, add the amount of output produced by each firm to determine the overall level of output produced at each level of marginal cost.

Tacit Collusion. Coordinated behavior among oligopoly firms that is achieved without a formal agreement.

Price Leadership. An oligopoly strategy in which one firm in the industry institutes price increases and waits to see if they are followed by rival firms.

Chapter 8 Econ Notes

Market power is the ability of a firm to influence the prices of its product and develop other competitive strategies that enable it to earn large profits over longer periods of time.

Monopoly is a market structure characterized by a single firm producing a product with no close substitutes.

Price-searcher is a firm in imperfect competition that faces a downward sloping demand curve and must search out the profit-maximizing price to charge for its product.

Barriers to entry are the structural, legal, or regulatory characteristics of a firm and its market that keep other firms from producing the same or similar products at the same cost.

Public goods have a higher cost of exclusion and are nonrival in consumption.

Costs of Exclusion are the costs of using a pricing mechanism to exclude people from consuming a good if they do not or cannot pay the price of the good.

Nonrival consumption. Once a nonrival good is provided, everyone can consume it simultaneously (i.e. – one person's consumption of the good does not affect the consumption of that good by another person). E.g. – information.

Lock-in and switching costs is a form of market power for a firm where consumers become locked into purchasing certain types or brands of products because they would incur substantial costs if they switched to other products.

Network externalities. A barrier to entry that exists because the value of a product to consumers depends on the number of consumers using the product.

Lerner index. A measure of market power that focuses on the difference between a firm's product price and its marginal cost of production.

Concentration ratios are a measure of market power that focuses on the share of the market held by the X largest firms, where X typically equals four, six or eight.

Herfindahl-Hirschman Index (HHI). A measure of market power that is defined as the sum of the squares of the market share of each firm in an industry.

Antitrust laws. Legislation, beginning with the Sherman Act of 1890, that attempts to limit the market power of firms and to regulate how firms use their market power to compete with each other.

Chapter 7 Econ Notes

Perfect competition is a market structure characterized by a large number of firms in the market, an undifferentiated product, ease of entry into the market, and complete information available to all market participants.

Price-taker is a characteristic of a perfectly competitive market in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.

Profit maximization is the assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible. This can be accomplished by focusing on revenues or costs or both factors.

Profit-maximizing rule is that to maximize profits, a firm should produce the level of output where marginal revenue equals marginal cost.

Marginal revenue for the perfectly competitive firm is a horizontal line on the supply and demand curve because the firm can sell all units of output at the market price, given the assumption of a perfectly elastic demand curve. Price equals marginal revenue for the perfectly competitive firm.

Shutdown point for the perfectly competitive firm. The price, which equals a firm's minimum average variable cost, below which it is more profitable for the perfectly competitive firm to shut down than to continue to produce.

Supply curve for the perfectly competitive firm. The portion of a firm's marginal cost curve that lies above the minimum average variable cost.

Supply curve for the perfectly competitive industry. The curve that shows the output produced by all perfectly competitive firms in the industry at different prices.

Equilibrium point for the perfectly competitive firm is the point where price equals average total cost because the firm earns zero economic profit at this point. Economic profit incorporates all implicit costs of production, including a normal rate of return on the firm's investment.

Economies of Scale achieve lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve.

Diseconomies of Scale incur higher unit costs of production by adopting a larger scale of production, represented by the upward sloping portion of a long-run average cost curve.

Industry concentration is a measure of how many firms produce the total output of an industry. The more concentrated the industry the fewer the firms operating in that industry.

Price-cost margin (PCM) is the relationship between price and costs for an industry, calculated by subtracting the total payroll and the cost of materials from the value of shipments and then dividing the results by the value of the shipments. The approach ignores taxes, corporate overhead, advertising and marketing, research, and interest expenses.

SUMMARY: Perfect competition is a form of market structure in which individual firms have no control over product price, which is established by industry or market demand and supply. In the short run, perfectly competitive firms take the market price and produce the amount of outp tht atmaximizes their profits. Profist earned in the short run can be positive, zero, or negative. Perfectly competitive firms are not able to earn positive economic profist in the long run because these profist will be competed away by entry of other firms. Likewise, any losss will be competed away by frims leaving the industry.
To lower their costs, firms also seek to produc at the optimal scale of operation. However, this scale will be adopted by all firms in the long run, and entry will force prices to equal long-run average cost, the zero-profit equilibrium.