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its current price and quantity. The kink in the demand curve results in a gap in the marginal
revenue curve. Thus, a change in marginal cost may result in no change in price or quantity.
According to the unkinked demand curve theory, there is no kink in the demand curve for an
oligopoly, and oligopoly is similar to monopolistic competition.
A cartel is an organization through which members jointly make decisions about prices and
production. A cartel sets output and price for the industry, as would a monopoly, and allocates
production to member firms. Cartels are difficult to maintain due to; (1) noncartel competition, and
(2) the tendency of cartel members to “cheat” on the agreement.
Oligopoly is inefficient because it results in a quantity of output where price exceeds marginal
cost, and thus where marginal social benefit exceeds marginal social cost.
Questions for Chapter 23
Fill-in-the-blanks:
1. ______________________ ______________________ is many sellers of similar products.
2. ______________________ ______________________ is the process of distinguishing a
firm’s product from similar products.
3. ______________________ is an industry dominated by a few mutually interdependent firms.
4. A ______________________ is an organization through which members jointly make
decisions about prices and production.
5. ______________________ ______________________ is a method for analyzing stragetic
behavior.
6. ______________________ ______________________ is a strategy that always yields the
best result regardless of the strategies of the other players.
7. ______________________ ______________________ is the outcome when each game
player has chosen their best strategy, assuming that all other players have also chosen their
best strategies.
Multiple Choice:
___ 1. Product differentiation benefits a monopolistic competitor by:
a. increasing the firm’s market power
b. increasing the demand for the firm’s product
c. Both of the above
d. Neither of the above
___ 2. Like perfect competition, monopolistic competition:
a. has many sellers
b. has no market power
c. Both of the above
d. Neither of the above
___ 3. For a monopolistic competitor:
a. the demand curve and the marginal revenue curve are the same
b. price equals marginal revenue
c. profit-maximization occurs at the economically efficient quantity
d. None of the above
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
23 - 11 Monopolistic Competition and Oligopoly