Question | Answer |
monopoly | a market in which a single firm sells a product that does not have any close substitutes |
market power | the ability of a firm to affect the price of its product |
barrier to entry | something that prevents firms from entering a profitable market |
patent | the exclusive right to sell a new good for some period of time |
network externalities | the value of a product to a consumer increases with the number of other consumers who use it |
natural monopoly | a market in which the economies of scale in production are so large that only a single large firm can earn a profit |
deadweight loss from monopoly | a measure of the inefficiency from monopoly; equal to the decrease in the market surplus |
rent seeking | the process of using public policy to gain economic profit |
price discrimination | the practice of selling a good at different prices to different consumers |
monopolistic competition | a market served by many firms that sell slightly different products |
product differentiation | the process used by firms to distinguish their products from the products of competing firms |
oligopoly | a market served by a few firms |
game theory | the study of decision making in strategic situations |
concentration ratio | the percentage of the market output produced by the largest firms |
duopoly | a market with two firms |
cartel | a group of firms that act in unison, coordinating their price and quantity decisions |
price-fixing | an arrangement in which firms conspire to fix prices |
game tree | a graphical representation of the consequences of different actions in a strategic setting |
dominant strategy | an action that is the best choice for a player, no matter what the other player does |
duopolists' dilemma | a situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price |
Nash equilibrium | an outcome of a game in which each player is doing the best he or she can, given the action of the other players |
low-price guarantee | a promise to match a lower price of a competitor |
grim-trigger strategy | a strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit |
tit-for-tat | a strategy where one firm chooses whatever price the other firm chose in the preceding period |
price leadership | a system under which one firm in an oligopoly takes the lead in setting prices |
kinked demand curve model | a model in which firms in an oligopoly match price cuts by other firms, but do not match price hikes |
payoff matrix | a matrix or table that shows, for each possible outcome of a game, the consequences for each player |
limit pricing | the strategy of reducing the price to deter entry |
contestable market | a market with low entry and exit costs |
marginal principle | increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost |
profit formula | profit= total revenue-total cost |
A firm has an opportunity for price discrimination if three conditions are met: | 1. Market power. 2. Different consumer groups. 3. Resale is not possible. |