Chapter 14 – Market Structure, Market Power, and Public Policy

Vocabulary flashcards covering key terms from Chapter 14 on market structure, market power, price setting, problems of market power, and public policy responses.

Market Structure

The competitive environment in which a business operates, defined by the number of firms and the nature of the product.

Market Power

The ability of a seller to charge a higher price without losing many sales to rivals.

Perfect Competition

A market with many buyers and sellers offering identical products, leaving each firm with zero market power and making them price-takers.

Price-Taker

A firm that must charge the prevailing market price because raising price loses all customers and lowering price needlessly cuts profit.

Monopoly

A market with only one seller of a unique product, giving the firm substantial market power.

Price-Maker

A firm with market power that can set its own price rather than accept a market-given price.

Monopolistic Competition

A market with many small firms selling differentiated products, each enjoying some market power.

Product Differentiation

Efforts by sellers to make their products distinct from competitors’ offerings through features, brand, quality, or service.

Oligopoly

A market dominated by a small number of large sellers whose pricing and output decisions are strategically interdependent.

Imperfect Competition

Markets—such as monopolistic competition and oligopoly—in which firms face limited competition and possess some market power.

Spectrum of Market Power

A range running from perfect competition (least power) through imperfect competition to monopoly (most power).

Barriers to Entry

Obstacles that deter new firms from entering a market, helping incumbents sustain market power and long-run profits.

Firm Demand Curve

A graph showing the quantities a specific firm can sell at various prices, reflecting its market power.

Market Demand Curve

A curve showing total quantity demanded across all firms in the market at each price.

Marginal Revenue (MR)

The additional revenue a firm earns from selling one more unit of output.

Total Revenue

Price multiplied by quantity sold; the overall sales income of a firm.

Output Effect

The revenue gained from selling an extra unit at the new price (equal to the price of that unit).

Discount Effect

The revenue lost on all previous units when a firm lowers its price to sell an extra unit (price cut times quantity).

MR Formula

Marginal Revenue = Output Effect – Discount Effect.

Marginal Cost (MC)

The additional cost incurred from producing one more unit of output.

Rational Rule for Sellers

Produce the quantity where marginal revenue equals marginal cost, and charge the highest price on the demand curve for that quantity.

Strategic Interaction

When a firm’s best decision depends on the expected actions of rivals, common in oligopoly.

Average Cost

Total cost divided by quantity produced; used to gauge profit per unit.

Profit Margin

The difference between price and average cost; wider under market power.

Economic Profit

Total revenue minus total cost (including opportunity costs); can be sustained in the presence of market power.

Underproduction (Market Failure)

The inefficiently low quantity produced when market power allows price to exceed marginal cost.

Patent

A government-granted, temporary monopoly right to be the sole seller of an invention, encouraging innovation but granting market power.

Competition Policy (Antitrust)

Laws and regulations aimed at preserving competition and limiting market power abuses.

Collusion

An agreement among firms to restrict competition, such as fixing prices or limiting output.

Anti-Collusion Laws

Regulations that prohibit firms from cooperating to reduce competition.

Merger Laws

Rules that allow or block company combinations based on their potential to lessen competition or create monopoly power.

Predatory Pricing

Setting prices below cost to drive rivals out, intending to raise prices later; considered an illegal attempt to monopolize.

Natural Monopoly

A market where one firm can supply the entire demand at lower cost than multiple firms due to large economies of scale.

Price Ceiling

A regulatory cap on the price a firm can charge, often used to limit monopoly abuse.

International Trade

Opening domestic markets to foreign competitors, thereby increasing competition and limiting domestic market power.

Attempt to Monopolize

Using exclusionary or unfair practices to obtain or maintain monopoly power, forbidden under antitrust law.

Cost-Benefit Principle

Decision rule to pursue an action when its marginal benefits outweigh its marginal costs; underlies quantity decisions.

Marginal Principle

Evaluate whether doing a little more or a little less of something increases net benefit; central to MR=MC rule.