Chapter 8 Imperfect Competition

 Monopolistic Competition Characteristics  Many sellers  Easy entry and exit  Differentiated product  Nonprice competition  Price Searcher Model Zero economic profits in the long run Demand saturation Turnover rate Excess capacity: wastes resources

 Advertising Increases Demand Differentiate products Sends a signal to customers  Brand name – word, picture or logo  Trademark – mark or motto Exclusive rights Expensive

 Oligopoly Characteristics  Few dominant sellers  Differentiated product  Nonprice competition  Interdependence Opportunistic behavior – ignore long term effects of cooperation Noncooperative behavior – maximize their own welfare Market Power  Concentration Ratio = Sales of top 4/Sales of the industry Duopoly – 2 firms

Price Discrimination – charging different consumers different prices for the same good  Conditions Market power Segment the market  Location  Age  Gender  Time of Use Seal the market – prevent reselling Turns loss into a profit

Oligopoly Models Collusion – Agreement among parties to set the price  Incentive to cheat Price Leadership – one firm sets the price and the others follow  Tacit collusion – don’t actually meet Price War – repeatedly cutting price to capture more market share Game Theory – shows interdependence among firms  Strategic dependence – each reacts to the actions of the others Kinked Demand Curve – firms follow a price decrease but not an increase