Economics Chapter 13

Economics Chapter 13 - Economics Chapter 13 Study Guide 1)...

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Economics Chapter 13 Study Guide 1) Introduction a) Oligopoly is a market structure in which a small number of interdependent firms compete. b) We use a different approach for 2 reasons: i) Use economic models that allow us to analyze the more complex business strategies of large oligopoly firms. ii) Not realistic to use demand curves. c) The approach used to analyze competition among oligopolies is called game theory. i) Game theory can be used to analyze any situation in which groups or individuals interact. ii) Game theory is the study of the decisions of firms in industries where the profits of each firm depend on its interaction with other firms. 2) Oligopoly and Barriers to Entry a) Oligopolies are industries with only a few firms. i) Examples: (1) Discount department stores (2) Warehouse Clubs and Super-centers (3) College Bookstores (4) Athletic Footwear Stores (5) Radio, TV and other Electronic Stores (6) Hobby, Toy and Game Stores (7) Pharmacies and Drugstores (8) Cigarettes b) One measure of the extent of competition in an industry is the concentration ratio. If a four-firm concentration ratio is greater than 40% that indicates that the industry is an oligopoly. c) Concentration ratio has some flaws as a measurement of the extent of competition in an industry. i) Doesn’t include sales in the US by foreign firms. ii) It is calculated for the national market but sometimes there are local competitions. iii) Competition exists between firms in different industries. d) Barriers to Entry i) Barrier to entry is anything that keeps new firms from entering an industry in which firms are earning economic profits. ii) Very difficult to join the market for oligopoly. iii) Three main barriers to entry: (1) Economies of Scale (a) Economies of scale exist when a firm’s long-fun average costs fall as it increases output. (b) If economies of scale are significant, the typical firm will not reach the minimum point on its long-rum average cost curve until it has
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produced a large fraction of industry sales. (c) Large discount department stores, such as Wal-Mart, have much lower average costs than small discount department sores (i) Ex: Wal-Mart, Target, Kmart and Costco account for 95% of all sales in this industry. (2) Ownership of a key input (a) If production of a good requires a particular input then control of that input can be a barrier to entry. (3) Government-imposed barriers (a) Examples of government-imposed barriers to entry are: (i) Patents 1. Patent is the exclusive right to a product for a period of 20 years from the date the product was invented. 2.
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Economics Chapter 13 - Economics Chapter 13 Study Guide 1)...

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