Chapter 9: Market Structures, Perfect Competition, Monopoly, and Things Between

Perfect competition

The most competitive market structure is characterized by many small price-taking firms producing a standardized product in an industry in which there are no barriers to entry or exit

Profit maximizing rule

All firms maximize profit by producing where MR = MC

Breakeven point

The output in perfect competition where ATC is minimized and economic profit is zero

Shutdown point

The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run

Perfectly competitive long-run equilibrium

Occurs when there is no more incentive for firms to enter or exit. *P* = MR = MC = ATC and π = 0

Normal profit

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

Constant cost industry

Entry (or exit) of firms does not shift the cost curves of firms in the industry

Increasing cost industry

Entry of new firms shifts the cost curves for all firms upward

Decreasing cost industry

Entry of new firms shifts the cost curves for all firms downward

Monopoly

The least competitive market structure; it is characterized by a single producer, with no close substitutes, barriers to entry, and price-making power

Market power

The ability to set the price above the perfectly competitive level

Natural monopoly

The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand

Monopoly long-run equilibrium

*P*m > MR = MC, which is not allocatively efficient and deadweight loss exists. *P*m > ATC, which is not productively efficient. πm > 0 so consumer surplus is transferred to the monopolist as profit

Price discrimination

The practice of selling essentially the same good to different groups of consumers at different prices

Perfect price discrimination

The type of price discrimination in which each consumer pays exactly his or her maximum willingness to pay. Consumer surplus is eliminated, yet the allocatively efficient output is produced

Monopolistic competition

A market structure characterized by a few small firms producing a differentiated product with easy entry into the market

Monopolistic competition long-run equilibrium

*P*mc > MR = MC and *P*mc > minimum ATC, so the outcome is not efficient, but πmc = 0

Excess capacity

The difference between the monopolistic competition output *Q*mc and the output at minimum ATC. Excess capacity is underused plant and equipment

Oligopoly

A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry

Four-firm concentration ratio

A measure of industry market power. If the combined market share of the four largest firms is above 40 percent, it is a good indicator of oligopoly

Non-collusive oligopoly

Models where firms are competitive rivals seeking to gain at the expense of their rivals

Prisoner’s dilemma

A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies

Dominant strategy

A strategy that is always the best strategy to pursue, regardless of what a rival is doing

Nash equilibrium

The outcome of a game for which each player’s strategy maximizes his or her payoff, given the strategies used by the rival players

Collusive oligopoly

Models where firms agree to mutually improve their situation

Cartel

A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions. Cartel members operate as a monopolist to maximize their joint profits