Market power: The ability to set the price above the perfectly competitive level.
Natural monopoly:The case where economies of scale are so extensive that it is less costly
for one firm to supply the entire range of demand.
Monopoly long-run equilibrium:Pm>MR =MC, which is not allocatively efficient and
deadweight loss exists. Pm>ATC, which is not productively efficient. Pm>0 so consumer
surplus is transferred to the monopolist as profit.
Price discrimination:The practice of selling essentially the same good to different groups
of consumers at different prices.
Monopolistic competition:A market structure characterized by a few small firms produc-
ing a differentiated product with easy entry into the market.
Monopolistic competition long-run equilibrium: Pmc>MR =MC and Pmc>minimum
ATC, so the outcome is not efficient, but Pmc=0.
Excess capacity:The difference between the monopolistic competition output Qmcand the
output at minimum ATC. Excess capacity is underused plant and equipment.
Oligopoly:A very diverse market structure characterized by a small number of interdependent
large firms, producing a standardized or differentiated product in a market with a barrier to
entry.
Four-firm concentration ratio:A measure of industry market power. If the combined market
share of the four largest firms is above 40 percent, it is a good indicator of oligopoly.
Non-collusive oligopoly:Models where firms are competitive rivals seeking to gain at the
expense of their rivals.
Prisoners’ dilemma:A game where the two rivals achieve a less desirable outcome because
they are unable to coordinate their strategies.
Dominant strategy:A strategy that is always the best strategy to pursue, regardless of what
a rival is doing.
Collusive oligopoly: Models where firms agree to mutually improve their situation.
Cartel:A group of firms that agree not to compete with each other on the basis of price,
production, or other competitive dimensions. Cartel members operate as a monopolist to
maximize their joint profits.
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