(Microeconomics) Chapter 11 Terms

A market structure with more than one firm in an industry in which at least one firm is a price setter.

A model characterized by many firms producing similar but differentiated products in a market with easy entry and exit.

Situation in which a firm operates to the left of the lowest point on its average total cost curve.

Situation in which a market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.

The percentage of output accounted for by the largest firms in an industry.

An alternative measure of concentration found by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares.

An industry that has only two firms.

When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits.

Firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms.

An unwritten, unspoken understanding through which firms agree to limit their competition.

A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account.

An analytical approach through which strategic choices can be assessed.

The outcome of a strategic decision.

When a player's best strategy is the same regardless of the action of the other player.

A game in which there is a dominant strategy for each player.

Situation in which a firm responds to cheating by cheating, and responds to cooperative behavior by cooperating.

Situation in which a firm makes clear that it is willing and able to respond to cheating by permanently revoking an agreement.

The key characteristics of oligopoly are a recognition that the actions of one firm will produce a response from rivals and that these responses will affect it. Each firm is uncertain what its rivals' responses might be.

The degree to which a few firms dominate an industry can be measured using a concentration ratio or a Herfindahl-Hirschman Index.

One way to avoid the uncertainty firms face in oligopoly is through collusion. Collusion may be overt, as in the case of a cartel, or tacit, as in the case of price leadership.

Game theory is a tool that can be used to understand strategic choices by firms.

Firms can use tit-for-tat and trigger strategies to encourage cooperative behavior by rivals.

A monopolistically competitive industry features some of the same characteristics as perfect competition: a large number of firms and easy entry and exit.

The characteristic that distinguishes monopolistic competition from perfect competition is differentiated products; each firm is a price setter and thus faces a downward-sloping demand curve.

Short-run equilibrium for a monopolistically competitive firm is identical to that of a monopoly firm. The firm produces an output at which marginal revenue equals marginal cost and sets its price according to its demand curve.

In the long run in monopolistic competition any economic profits or losses will be eliminated by entry or by exit, leaving firms with zero economic profit.

A monopolistically competitive industry will have some excess capacity; this may be viewed as the cost of the product diversity that this market structure produces.

Situation in which a firm charges different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers.

If advertising reduces competition, it tends to raise prices and reduce quantities produced. If it enhances competition, it tends to lower prices and increase quantities produced.

In order to engage in price discrimination, a firm must be a price setter, must be able to identify consumers whose elasticities differ, and must be able to prevent resale of the good or service among consumers.

The price-discriminating firm will adjust its prices so that customers with more elastic demand pay lower prices than customers with less elastic demand.