Economics 26

Economics 101

Chapter 26

I) 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

II) 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

III) 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

IV) 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

(i) assumes