Chapter 16 Notes.docx - Chapter 16 Notes Between Monopoly...

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Chapter 16 Notes Between Monopoly and Perfect Competition In Chapter 14 , we saw that the price in a perfectly competitive market always equals the marginal cost of production. We also saw that, in the long run, entry and exit drive economic profit to zero, so the price also equals average total cost. In Chapter 15 , we saw how monopoly firms can use their market power to keep prices above marginal cost, leading to a positive economic profit for the firm and a deadweight loss for society. In other words, many industries fall somewhere between the polar cases of perfect competition and monopoly. Economists call this situation imperfect competition . oligopoly , a market with only a few sellers, each offering a product that is similar or identical to the products offered by other sellers in the market concentration ratio , which is the percentage of total output in the market supplied by the four largest firms. household appliances (which has a concentration ratio of 90 percent), tires (91 percent), light bulbs (92 percent), soda (94 percent), and wireless telecommunications (95 percent). These industries are best described as oligopolies. monopolistic competition . This describes a market structure in which there are many firms selling products that are similar but not identical. monopolistic competition describes a market with the following attributes: Many sellers: There are many firms competing for the same group of customers. Product differentiation: Each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward- sloping demand curve. Free entry and exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero. Oligopoly departs from the perfectly competitive ideal of Chapter 14 because there are only a few sellers in the market. The small number of sellers makes rigorous competition less likely and strategic interactions among them vitally important . If there is only one firm, the market is a monopoly. If there are only a few firms, the market is an oligopoly. If there are many firms, we need to ask another question: Do the firms sell identical or differentiated products? If the many firms sell identical products, the market is perfectly
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