Monopolies & Oligopolies
Terms
Pure monopoly
-
A firm that satisfies the following conditions:
- It is the only supplier in the market.
- There is no close substitute to the output good.
- There is no threat of competition.
Natural monopoly
-
A firm with such extreme economies of scale that once it begins creating a
certain level of output, it can produce more at a lower cost than any smaller
competitor. Generally characterized by a declining average cost curve.
Economies of scale
-
Savings acquired through increases in quantity produced. Oftentimes, large
firms in industries with high fixed costs can take advantage of savings that
smaller firms cannot.
Price taker
-
An agent who takes prices as given. For instance, a firm who faces a perfectly
flat demand curve has no choice but to
sell at one price. This firm is a price taker.
Perfect competition
-
A market operates under perfect competition if it satisfies the following
conditions:
- Numerous firms
- Freedom of entry and exit
- Homogeneous output
- Perfect information
Deadweight loss
-
The dollar amount of social surplus that goes unrealized as compared to the
socially optimal solution.
Price setter
-
The opposite of a price taker; a price setter has the power to set prices.
For instance, a firm who faces a downward sloping demand
curve can choose price.
Socially optimal
-
Describes points at which social surplus is maximized, social surplus being the
combined utilities of the firms and the public.
Oligopoly
-
A market dominated by a small number of firms. At least several of these firms
are large enough to influence the market price.
Duopoly
-
A market dominated by two firms. Both firms are large enough to influence the
market price.
Cournot duopoly
-
A model of duopolies under which two firms simultaneously choose the
quantity to produce.
Stackelberg duopoly
-
A model of duopolies under which two firms choose the quantity to produce
with one firm choosing before the other in an observable manner.
Bertrand duopoly
-
A model of duopolies under which two firms simultaneously choose the price
for a good.
Cartel
-
A small number of independent firms who act together to set monopoly prices and
make monopoly profits.
Public information
-
Information known to everyone.
Reaction curve
-
A reaction curve is a function that takes as input the moves of the other
players and returns the optimal move given the other players' moves.
Nash equilibrium
-
An equilibrium in which all players are playing their best responses to everyone
else's best response.
