Chapter 25 - Monopolistic Competition And Oligopoly

Chapter 25 Key Terms McConnell and Brue 14th Edition

monopolistic competition

A market structure in which many firms sell a differentiated product into which entry is relatively easy in which the firm has some control over its product price and in which there is considerable nonprice competition.

product differentiation

A strategy in which one firm’s product is distinguished from competing products by means of its design related services quality location or other attributes (except price).

nonprice competition

Distinguishing one’s product by means of product differentiation and then advertising the distinguished product to consumers.

excess capacity

Plant resources which are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.


A market structure in which a few firms sell either a standardized or differentiated product into which entry is difficult in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) and in which there is typically nonprice competition.

homogeneous oligopoly

An oligopoly in which the firms produce a standardized product.

differentiated oligopoly

An oligopoly in which the firms produce a differentiated product.

mutual interdependence

A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms); any firm which makes such a change can expect the other rivals to react to the change.

concentration ratio

The percentage of the total sales of an industry made by the four (or some other number) largest sellers in the industry.

interindustry competition

The competition for sales between the products of one industry and the products of another industry.

import competition

The competition which domestic firms encounter from the products and services of foreign producers.

Herfindahl index

A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms.

game theory model

A means of analyzing the pricing behavior of oligopolists using the theory of strategy associated with games such as chess and bridge.


A situation in which firms act together and in agreement (collude) to fix prices divide a market or otherwise restrict competition.

kinked demand curve

The demand curve for a noncollusive oligopolist which is based on the assumption that rivals will follow a price decrease and will ignore a price increase.

price war

Successive and continued decreases in the prices charged by the firms in an oligopolistic industry; each firm lowers its price below rivals’ prices hoping to increase its sales and revenues at its rivals expense.


A formal agreement among firms in an industry to set the price of a product and the outputs of the individual firms or to divide the market for the product geographically.

tacit understanding

When firms reach verbal understandings with one another on product price - frequently through interaction on golf courses, cocktail parties, via phone, or at trade association meetings. Historically, these understandings are referred to as Gentlemen's Agreements. Tacit understandings are in violation of anti-trust laws, but their elusive nature makes them difficult to detect.

price leadership

An informal method which firms in an oligopoly may employ to set the price of their product: one firm (the leader) is the first to announce a change in price and the other firms (the followers) soon announce identical or similar changes.