Chapter 13 Study Guide

Chapter 13 Study Guide - 13 Oligopoly: Firms in Less...

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Chapter 13 Oligopoly: Firms in Less Competitive Markets Chapter Summary In Chapters 11 and 12, you studied perfectly competitive and monopolistically competitive markets. You learned that firms maximize profits by producing where marginal revenue equals marginal cost. In this chapter, you will learn about another market structure – oligopoly. An oligopoly is a market structure in which a small number of interdependent firms compete. A measure of the extent of competition in an industry is the four-firm concentration ratio, which states the fraction of each industry’s sales accounted for by the four largest firms. Barriers to entry make it difficult for new firms to enter an oligopoly industry. Three barriers to entry are: 1. economies of scale. 2. ownership of a key input. 3. government-imposed barriers. To analyze oligopolies, economists use game theory , which is the study of how people make decisions in situations where attaining their goals depends on their interactions with others. In oligopolies, interactions among firms are crucial in determining profitability because all firms are large relative to the market. Michael Porter developed a model showing how five competitive forces determine the overall level of competition in an industry. These forces are: (1) competition from existing firms, (2) the threat from potential entrants, (3) competition from substitute goods or services, (4) the bargaining power of buyers, and (5) the bargaining power of suppliers. Learning Objectives When you finish this chapter, you should be able to: 1. Show how barriers to entry explain the existence of oligopolies. Barriers to entry make it difficult for new firms to enter an oligopoly market. The most important entry barrier is economies of scale. The greater the economies of scale, the fewer the number of firms in the industry. Another entry barrier is ownership of a key input. If production of a good requires a certain input, control over the supply of that input will be a barrier to entry. Government imposed barriers, such as patents, occupational licensing, or import restrictions (tariffs or quotas) may also limit entry of new firms.
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CHAPTER 13 | Oligopoly: Firms in Less Competitive Markets 364 2. Use game theory to analyze the strategies of oligopolistic firms. In oligopolies, the interaction of firms is crucial in determining profitability because firms are large relative to the market. Economists use game theory to predict the decisions of firms when their goals depend on interactions with other firms. 3. Use sequential games to analyze business strategies. Economists use sequential games to predict and explain the behavior of firms in business situations where the actions of one firm will lead to a response from another firm. Sequential games are used to analyze deterring entry and bargaining between firms. 4.
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Chapter 13 Study Guide - 13 Oligopoly: Firms in Less...

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