Market Structures and Competition
Core concepts
Compare structures on seller count, product differentiation, and entry barriers. Perfect competition has many sellers, identical products, free entry, price-taking firms, and zero long-run economic profit. Monopolistic competition has many sellers with differentiated products and free entry, so long-run profit is also zero but price exceeds marginal cost. Oligopoly has few sellers, strategic interdependence, and incentives to collude, though cartels are unstable because each member gains by cheating. Monopoly has one seller, high barriers, downward-sloping demand, and price above marginal cost; it produces less than the socially efficient quantity. A monopolist maximizes profit at MR = MC, then reads price off the demand curve. Price discrimination raises profit by charging each group its willingness to pay. Efficiency comparisons: perfect competition maximizes total surplus; monopoly creates deadweight loss.
Traps to watch
- Assuming monopolistically competitive firms earn long-run profit; entry erodes it.
- Setting monopoly price at MR = MC rather than reading price from demand.
- Believing oligopolists always collude successfully.
- Confusing productive efficiency (minimum ATC) with allocative efficiency (price equals marginal cost).
Worked example
A monopolist faces demand where MR = MC at quantity 40 and marginal cost $15; at that quantity the demand curve shows price $25. Output is 40, price $25. Rule of thumb: quantity from MR = MC, price from demand.