Chapter 11
Economics 121 with Lipman at Rutgers University - New Brunswick/Piscataway
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Monopolistic Competition
A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition.
Product Differentiation
A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).
Nonprice Competition
Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.
Four-Firm Concentration Ratio
The percentage of total industry sales accounted for by the top four firms in the industry.
Herfindahl Index
A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.
Excess Capacity
Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.
Oligopoly
A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.
Homogeneous Oligopoly
An oligopoly in which the firms produce a standardized product.
Differentiated Oligopoly
An oligopoly in which the firms produce a differentiated product.
Strategic Behavior
Self-interest economic actions that take into account the expected reactions of others.
Mutual Interdependence
A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change.
Interindustry Competition
The competition for sales between the products of one industry and the products of another industry.
Import Competition
The competition that domestic firms encounter from the products and services of foreign producers.
Game Theory
A means of analyzing the pricing behavior of oligopolists that use the theory of strategy associated with games such as chess and bridge.
Collusion
A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition.
Kinked-Demand Curve
The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.
Price War
Successive and continued decreases in the prices charged by firms in an oligopolistic industry. Each firm lowers its price below rivals' prices, hoping to increase its sales and revenues at its rivals' expense.
Cartel
A formal agreement among firms (or countries) in an industry to set the price of a product and to establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.
Price Leadership
An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and then the other firms (the followers) soon announce identical or similar changes in price.
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