Introduction to Imperfectly Competitive Markets - AP Microeconomics

1. Define Nash Equilibrium.

   No participant can gain by unilaterally changing their strategy. This represents a stable outcome where all players are satisfied with their choices.

2. Identify the impact of economies of scale on market structure.

   Can lead to natural monopolies. Large fixed costs make it efficient for fewer firms to serve the market.

3. What is market power?

   Ability to influence price or output levels. This contrasts with perfect competition where firms are price takers.

4. What is a cartel?

   An agreement among firms to control prices or production. This formal collusion reduces competition and typically leads to higher prices.

5. Identify one form of non-price competition.

   Advertising. This marketing strategy builds brand recognition and customer loyalty.

6. What characterizes a monopolistic market?

   A single seller controls the market. This market structure has no competitors, giving the firm complete pricing power.

7. What is the purpose of game theory in economics?

   Analyzing strategic interactions between firms. This mathematical framework models how firms make decisions considering competitors' responses.

8. What is the role of collusion in oligopolistic markets?

   Firms coordinate to maximize joint profits. Cooperation allows oligopolists to achieve monopoly-like profits by restricting competition.

9. What is the effect of price wars in oligopolies?

   Leads to lower prices and profits. Aggressive price competition erodes profit margins for all participating firms.

10. Identify a key feature of monopolistic competition.

    Many firms with differentiated products. Unlike oligopoly's few firms, this structure allows for numerous competing businesses.

11. Define oligopoly.

    A market with few large firms dominating. Unlike perfect competition, this market has limited competitors with significant market share.

12. What is meant by 'price rigidity' in an oligopoly?

    Prices tend to remain stable despite cost changes. Firms avoid price changes due to anticipated competitive responses.

13. What does 'price taker' mean in economic terms?

    A firm that cannot influence market prices. Such firms accept market price as given and cannot influence it through their actions.

14. What is a duopoly?

    A market dominated by two firms. This special case of oligopoly involves strategic interaction between two major players.

15. What does 'imperfect competition' mean?

    Market structures where assumptions of perfect competition do not hold. These markets deviate from perfect competition's assumptions of many firms and homogeneous products.

16. What is Bertrand competition?

    Firms compete by setting prices. This model assumes firms compete by simultaneously setting prices rather than quantities.

17. What is the significance of product differentiation in monopolistic competition?

    Leads to brand loyalty and market power. Unique products reduce price competition and allow for premium pricing strategies.

18. What role do patents play in imperfect competition?

    Create legal barriers to entry. Intellectual property protection prevents competitors from copying innovations.

19. Identify an example of a real-world oligopoly.

    Automobile industry. This industry exemplifies oligopoly with few major manufacturers dominating globally.

20. What is a zero-sum game?

    One player's gain is another's loss. Total payoffs always sum to zero across all players in the game.

21. What is the main characteristic of a natural monopoly?

    High fixed costs and economies of scale. One firm can serve the entire market more efficiently than multiple competitors.

22. What does the Lerner Index measure?

    Market power of a firm. Higher values indicate greater ability to set prices above marginal cost.

23. What characterizes a contestable market?

    No barriers to entry or exit. Easy entry/exit ensures firms behave competitively even with few actual competitors.

24. Identify a feature exclusive to oligopolistic markets.

    Interdependence among firms. Firms must consider how their actions will affect and provoke responses from rivals.

25. Identify a common outcome in collusive oligopolies.

    Higher prices and reduced output. Coordinated behavior allows firms to act like a monopoly.

26. What is mutual interdependence?

    Firms consider rivals' reactions in their decisions. Each firm's optimal strategy depends on what competitors are expected to do.

27. What is a payoff matrix?

    A table showing payoffs for each player in a game. This tool visualizes strategic interactions and helps predict outcomes in game theory.

28. What is product differentiation?

    Variety in products to distinguish them. Firms create unique features to reduce substitutability and gain competitive advantage.

29. What is a dominant strategy?

    A strategy that is best regardless of opponents' actions. This strategy guarantees the best outcome regardless of what competitors choose.

30. State the formula for the Lerner Index.

    $L = \frac{P - MC}{P}$. This index ranges from 0 (perfect competition) to 1 (monopoly).

31. What is a strategic barrier to entry?

    Actions by firms to deter new entrants. These include predatory pricing, exclusive deals, or capacity expansion threats.

32. Differentiate between monopolistic competition and monopoly.

    Monopolistic competition has many firms; monopoly has one. Number of firms is the key distinguishing factor between these market structures.

33. What is the Cournot model?

    An oligopoly model with firms choosing quantities. Firms simultaneously decide production levels, affecting market price through supply.

34. What is price leadership?

    One firm sets the price, others follow. This reduces price competition as followers accept the leader's pricing decisions.

35. What is the role of barriers to entry in oligopolies?

    They limit competition by preventing new firms from entering. These obstacles maintain oligopoly structure by deterring potential competitors.

36. What is non-price competition?

    Competing through means other than price, such as advertising. Firms differentiate through quality, service, or branding instead of lowering prices.

37. What is a kinked demand curve?

    A demand curve with a distinct 'kink,' suggesting price rigidity. Firms expect competitors will match price cuts but not price increases.

38. What is the primary feature of monopolistic competition?

    Product differentiation. This distinguishes monopolistic competition from perfect competition's homogeneous products.

39. What is the Stackelberg model?

    An oligopoly model with a leader-follower dynamic. One firm moves first, then the follower responds optimally to the leader's choice.

40. What is the effect of advertising in monopolistic competition?

    Increases demand and differentiates products. This non-price competition shifts demand curves and creates market power.

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