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Monopolies & Oligopolies

Terms

Introduction to Monopolies and Oligopolies

Monopolies

Pure monopoly  -  A firm that satisfies the following conditions:
  1. It is the only supplier in the market.
  2. There is no close substitute to the output good.
  3. 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:
  1. Numerous firms
  2. Freedom of entry and exit
  3. Homogeneous output
  4. 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.

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