1. Chapter 7 section 2 Monopolistic Competition and Oligopoly Monopolistic competition-A market structure w/ low entry barriers and many firms selling products differentiated enough that each firm’s demand curve slopes downward.

2. Market Characteristics B/c barriers to entry are low, firms in monopolistic competition can, in the long run, enter or leave the market w/ ease. Market characteristics

3. Product Differentiation Physical Differences, color, packaging, scent, design. Location, # & variety of locations where a product is available (differentiation). Available everywhere in the internet. Services, products differ in accompanying services. Product Image, a final way products differ is in the image the producer tries to foster in the consumer’s mind.

4. Costs of Product Differentiation Firms spend more on advertising and promotional expenses to differentiate their products. Increases average cost. Too many firms & product differentiation, artificial.

5. Excess Capacity Means that a firm could lower its average cost by selling more. Gas stations, drug stores, banks, convenience stores, restaurants, motels, bookstores, and flower shops

6. Oligopoly Market dominated by just a few firms 3 or 4 firms account for three-quarters of market output. B/c an oligopoly has a few firms, each must consider the effect of its own actions on competitors’ behavior. Industries-market for steel, oil, automobiles, breakfast cereals, & tobacco.

7. Undifferentiated oligopoly Sells commodity, ingot of steel or a barrel of oil. Oligopolies, such as automobiles or breakfast cereals, the product is differentiated across producers.

8. Differentiated oligopoly Sells products that differ across producers, such as Ford versus Toyota or General Food’s Wheaties versus Kellog’s Corn Flakes.

9. Firms in oligopoly Interdependent If any changes in price, output, or advertising may prompt a reaction from its rival. Firm may react if another firms alters any of these features.

10. Barriers of Entry An oligopoly can be traced to some barrier to entry, such as economies of scale or brand names built up by years of advertising. Economies of Scale- Minimum efficient scale is the lowest rate of output at which the firm takes full advantage of economies of scale.

11. The High Cost of Entry The total investment needed to reach the minimum-efficient size often is huge New company has to pay a huge sum, pay for advertising. If the product fails, that would cripple the company.

12. Product Differentiation Costs Oligopolists spend billions of dollars to differentiate their products. Ex. Pepsi and Coca Cola

13. Cartel Is a group of firms that agree to act as a single monopolist to increase the market price and maximize the group’s profits. Produce less, charge higher prices, earn more profit, & block entry market. Illegal in the USA Ex. OPEC Obstacles- cheat, entry of rival firms, fear technological change erode their power.