Study Notes
Imperfect competition includes market structures like monopolistic competition and oligopoly, where firms have some market power and face different levels of competition. Monopolistic competition involves many firms with low barriers to entry and product differentiation, while oligopoly is dominated by a few large firms with high barriers to entry.
- Monopolistic Competition — a market structure with many firms, low barriers to entry, and differentiated products. Example: Restaurants in a city.
- Oligopoly — a market structure dominated by a few large firms with high barriers to entry and interdependent decision-making. Example: The automobile industry.
- Collusive Oligopoly — firms agree to limit competition by fixing prices or output. Example: OPEC's oil production agreements.
- Non-Collusive Oligopoly — firms do not collude and instead compete independently but strategically. Example: Airlines adjusting prices based on competitors.
- Concentration Ratio — a measure of the total output produced by the largest firms in an industry. Example: A 3-firm concentration ratio of 75% means the top three firms produce 75% of the output.
Exam Tips
Key Definitions to Remember
- Monopolistic Competition
- Oligopoly
- Collusive Oligopoly
- Non-Collusive Oligopoly
- Concentration Ratio
Common Confusions
- Confusing monopolistic competition with monopoly due to the similar name.
- Misunderstanding the difference between collusive and non-collusive oligopolies.
Typical Exam Questions
- What is monopolistic competition? A market structure with many firms, low barriers to entry, and differentiated products.
- How does an oligopoly differ from a monopoly? Oligopoly has a few large firms with high barriers to entry, while monopoly has one firm dominating the market.
- What is the significance of a concentration ratio? It measures the market share of the largest firms, indicating the level of competition.
What Examiners Usually Test
- Ability to explain and illustrate market structures with diagrams.
- Understanding of the advantages and disadvantages of different market structures.
- Application of game theory to oligopoly scenarios.