Microeconomics – Roger A. Arnold – Chapter 11 (Monopolistic Competition, Oligopoly, and Game Theory)

1. There are many seller and buyers
2. Each firm (in the industry) produces and sells a slightly differentiated product
3. Entry and exit are easy.

A price searcher.

Virtually none

Many rivals

They produce the quantity of output at which MR = MC.

They produce a close substitute for the product made by existing firms, but not an identical one.

When firms try to differentiate their products from those of other sellers in ways other than price. (Ex. Wheaties' cereal advertises itself as "Breakfast of Champions.)

States that: a monopolistic competitor in equilibrium produces an output smaller than the one that would minimize its costs of production

It is a consequence of its downward-sloping demand curve.

When it charges a price that is equal to its lowest ATC

No, because they operate at excess capacity

1. There are few sellers and many buyers
2. Firms produce and sell either homogeneous or differentiated products
3. The barriers to entry are significant

The percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by x number of firms in the industry

A theory of oligopoly in which oligopolistic firms act as if there were only one firm in the industry

An organization of firms that reduces output and increases price in an effort to increase joint profits

It is not legal, and getting the sellers of an industry together to form a cartel can be very costly.

Even if firms came together to form a cartel, disagreements over policy would arise

If cartel members somehow agreed on a policy that would mean high profits for them, this would incentivize other firms to enter the industry and create competition

After a cartel agreement is made, members may be motivated to cheat the agreement.

A mathematical technique used to analyze the behavior of decision makers who try to reach an optimal position for themselves through game playing or the use of strategic behavior, who are fully aware of the interactive nature of the process at hand, and who anticipate the moves of other decision makers

Both firms must have some entity to enforce the cartel agreement so that neither cheat.

A market in which entry is easy and exit is costless, new firms can produce the product at the same cost as current firms, and existing firms can easily dispose of their fixed assets by selling them

1. The firms do not necessarily perform in a noncompetitive way
2. Profits can be zero
3. Inefficient producers cannot survive
4. Sellers can sell at a price equal to marginal cost

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