Economics 26
Economics 101
Chapter 26
Strategic Behavior
entails ascertaining what other people or firms are likely to do in a specific situation and then pursuing tactics that maximize your gains or minimize your losses
Product Differentiation
definition: the process of altering goods that serve a similar purpose so that they differ in minor (either real or imagined) ways
differentiation only requires that consumers perceive differences
Monopolistic Competition
definition: requires easy entry and exit into industries in which many potential suppliers compete vigorously with makers of close, but not perfect, substitutes for their brand-name products
monopolistic competitive industries have:
large numbers of potential buyers and suppliers
differentiated products that are close substitutes
easy entry and exit in the long run
short-run pricing and output
regardless of market structure, all firms maximize profit by producing where marginal revenue equals marginal cost
long-run adjustments
monopolistic competitors differentiate products to exploit short-run profit opportunities, and they would like their profits to persist
typical monopolistic competitors earn only normal profits in the long run
resource allocation and efficiency
the failure of firms to have market power to produce that output which minimizes average total costs is known as excess capacity theorem
monopolistic competition is both allocatively and productively inefficient
Oligopoly
definition: an industry dominated by a few firms whose decisions are strategically linked; barriers to entry tend to be significant
mutual interdependence
exists when firms consider their rivals reactions while adjusting prices, outputs, or product lines
origins of oligopoly
major causes of oligopoly are mergers and barriers to entry
oligopolistic decision-making
kinked demand curve model
assumes