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| QUICK REVIEW 25-1 |
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- Monopolistic competition involves a relatively
large number of firms operating noncollusively and producing differentiated products with
easy entry and exit.
- In the short run
a monopolistic competitor will
maximize profit or minimize loss by producing that output at which marginal revenue equals
marginal cost.
- In the long run
easy entry and exit of firms
cause monopolistic competitors to earn only a normal profit.
- A monopolistic competitor's long-run equilibrium
output is such that price exceeds the minimum average total cost (implying that consumers
do not get the product at the lowest price attainable) and price exceeds marginal cost
(indicating that resources are underallocated to the product).
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| QUICK REVIEW 25-2 |
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- An oligopolistic industry is made up of
relatively few firms producing either homogeneous or differentiated products; these firms
are mutually interdependent.
- Barriers to entry such as scale economies
control of patents or strategic resources
or the ability to engage in retaliatory pricing
characterize oligopolies. Oligopolies can result from internal growth of firms
mergers
or both.
- The four-firm concentration ratio shows the
percentageof an industry's sales accounted for by its four largest firms; the Herfindahl
index measures the degree of market power in an industry by summing the squares of the
percentage market shares held by the individual firms in the industry.
- Game theory reveals that (a) oligopolies are
mutually interdependent in their pricing policies; (b) collusion enhances oligopoly
profits; and (c) there is a temptation for oligopolists to cheat on a collusive agreement.
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| QUICK REVIEW 25-3 |
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- In the kinked-demand theory of oligopoly
price
is relatively inflexible because a firm contemplating a price change assumes that rivals
will follow a price cut and ignore a price increase.
- Cartels agree on production limits and set a
common price to maximize the joint profit of their members as if each were a unit of a
single pure monopoly.
- Collusion among oligopolists is difficult because
of (a) demand and cost differences among sellers
(b) the complexity of output
coordination among producers
(c) the potential for cheating
(d) a tendency for
agreements to break down during recessions
(e) the potential entry of new firms
and (f )
antitrust laws.
- Price leadership involves an informal
understanding among oligopolists to match any price change initiated by a designated firm
(often the industry's dominant firm).
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