MCO - Monopolistic Competition and Oligopoly Overview
Monopolistic Competition and Oligopoly Overview
Introduction
In the previous module, we evaluated the characteristics and efficiency of the two extremes - perfect competition and monopoly - on the spectrum of competition. However, most goods and services are bought and sold in the two market structures that exist between these extremes. In this module, you will learn about the two variations of these extremes - monopolistic competition and oligopolistic competition. You will learn the characteristics of each, as well as their implications in terms of efficiency in the market.
Essential Questions
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- Why is product differentiation a necessary characteristic of monopolistic competition? How does it give a firm market power?
- What is non-price competition?
- What is meant by excess capacity and how does it relate to the concept of efficiency?
- How does a monopolistic competitor act like a monopoly in the short run?
- How does a monopolistic competitor act like a perfect competitor in the long run?
- What are the key characteristics of oligopolies?
- How is collusion used to gain market power?
- What is game theory? How does it help explain interdependence among firms in an oligopolistic market?
- What is a dominant strategy?
- What is the significance of Nash equilibrium?
Key Terms
Click here to download the key terms document for this module. Links to an external site.
Monopolistic Competition – this market structure is characterized by many small firms producing a differentiated product with easy entry and exit into the market.
Non-price Competition – a strategy used by firms to distinguish their product or service from competing products on the basis of the products characteristics, rather than its price.
Oligopoly – this market structure is characterized by a small number of interdependent, large firms who can produce either identical or differentiation products in a market with high barriers to entry.
Collusion – an arrangement among oligopolists to work together to mutually improve their situation.
Cartel – this is a group of firms that agree to maximize their joint profits rather than compete.
Game Theory – this approach models the strategic interactions of firms in oligopoly markets.
Dominant Strategy – is a strategy that is always the best strategy to pursue, no matter what a competitor is doing.
Nash Equilibrium – a solution concept in a non-cooperative game in which no player would deviate from unilaterally.
Payoff Matrix – the matrix is a table that demonstrates the payoffs associated with different decisions among players.
Excess Capacity – in this situation, a firm is producing at a lower scale of output than it is capable of; the difference between the long run output in monopolistic competition and the output at minimum ATC.
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