chapter 14: market structure and market power

Collusion

an agreement to limit competition, rivals agree to all charge high prices

Competition policy

laws and regulations designed to ensure that markets remain competitive, also called antitrust policy

Firm demand curve

how the quanity that buyers demand from an individual firm or business varies as it changes the price it charges

Imperfect competition

when you face at least some competitors and/or you sell products that differ at least a little from your competitors, includes monopolistic competition and oligopoly

Marginal revenue

the addition to total revenue you get from selling one more unit

Market power

the extent to which a seller can charge a higher price without losing many sales to competing businesses

Monopolistic competition

a market with many small businesses competing, each selling differentiated products

Monopoly

when there is only one seller in the market

sources of monopoly

patents, natural monopoly

Natural monopoly

a market in which it is cheapest for a single business to service the market

Oligopoly

a market with only a handful of large sellers, strategic interaction with other firms

Perfect competition

markets in which all businesses in an industry sell an identical good and there are many sellers and many buyers, each of whom is small relative to the size of the market

Product differentiation

efforts by sellers to make their products differ from those of their competitors

Rational rule for sellers

sell one more item if the marginal revenue is greater than (or equal to ) marginal cost

output effect

increase in revenue from extra unit sold (= price of extra unit)

discount effect

loss in revenue from lowering the price (= change in price X quantity)

marginal revenue

output effect - discount effect

policies that increase competition

anti-collusion laws

merger laws

ban attempts to monopolize

encouraging international trade

policies that minimize harm from market power

price ceiling

natural monopolies require special regulation

effects of market power

higher price

inefficiently lower quantity

larger economic profit for firm with market power

potentially inefficiently high costs