Market Structure and Performance

If there is only one seller of a product, that market is called as  monopolist

The equilibrium of a firm requires maximization of its profit defined as the difference between total
revenue and total cost.

(1) There are many sellers (firms) and buyers in the market. Therefore, each firm alone
cannot affect the market price by changing its output.

(2) Firms produce the same homogenous (identical) product.

(3) There are no barriers to enter into or exit from the market. This ensures that the
number of firms in the market adjusts until all firms earn zero economic profit.
(4) Information is perfect. Consumers are fully aware of their alternatives, and firms
have complete knowledge about their production possibilities.

The short-run supply curve of the competitive firm is the positively sloped segment of the firm’s short-run marginal cost (SMC) curve which lies above the SAVC curve.

The minimum point of SAVC (point A) is the shutdown point.

It is defined as the difference between the amount the consumers would be willing to pay for a
commodity and the amount actually paid.

The total welfare (W) is the combined welfare of consumers and producers. In other words, it is the
overall well-being of society. It is defined as the total surplus, which is the sum of producer and consumer surpluses.

The firm maximizes profit when the MR = MC. Note that we have not assumed anything about the market structure so far. This condition is general and valid for all types of markets.

Each firm makes zero (normal) profit and operates at the minimum point of its long-run average cost curve (LACmin) in the long-run equilibrium due to free entry and exit.

In markets where profit maximization does not involve the satisfaction of
the P=MC condition, there will be a loss in the total surplus, called the deadweight loss.

In a monopoly market, there is a single firm in the industry, where there are entry barriers,
and the commodity produced by the monopolist has no close substitutes.

The monopolist faces a negatively sloped demand curve; therefore, the market price is always
above the marginal revenue. This is different from a perfectly competitive firm that faces a
horizontal demand curve defined by the market price which is also its marginal revenue curve.

 The Lerner index measures the percentage markup that a firm is able to charge over its marginal cost. Therefore, it provides a measure of market power.

The Lerner index will be zero for a perfectly competitive firm because its price equals to the marginal cost (P=MC).

The condition above indicates that the Lerner index is inversely proportional to the demand elasticity, i.e., the less elastic the demand, the greater the difference between price and marginal cost, and the greater the market power of the monopolist. The intuition behind this result is that a monopoly operating in a high-elasticity market will not be able to raise its price much above its marginal cost because consumers in such a market respond to price increases by significantly reducing their demand.

The Stackelberg model is a quantity game, but it is a dynamic game in that one firm assumes the leadership role and chooses its output level first, while the other firm acts as a follower and chooses its output level after observing the leader’s choice. By considering how the follower will respond after observing the leader’s decision, the leader gains a strategic advantage known as the first-mover advantage

A set of strategies (one for each player) constitutes a Nash equilibrium if, given the
strategies of the other players, no player can obtain a higher payoff by unilaterally
changing her own strategy. As a result, in a Nash Equilibrium, no player will have an incentive to deviate from her strategy

The Hirschman-Herfindahl index (HHI) is another commonly used indicator and is defined as the sum of the squares of market shares of all firms in the market: HHI = ∑i s i 2 An HHI value close to 0 means more competition, and 1 means monopoly.

Monopolistic competition is a market structure that is characterized by three features: (i) There are a large number of competing firms selling differentiated products that are highly substitutable but not perfect substitutes for one another; (ii) Because of product differentiation, each firm faces a downward-sloping demand curve rather than a horizontal one, implying that it has some market power; (iii) There are no restrictions or barriers to enter into or exit from the market.

The long-run equilibrium in a monopolistic competition market is similar to that in a perfectly
competitive market in that each firm is making zero profits. However, in perfect competition, the
demand curve of an individual firm is horizontal, so the zero-profit point occurs at the minimum
of the average cost curve. In a monopolistically competitive market, on the other hand, each firm confronts a downward-sloping demand curve, so the zero-profit point is to the left of the minimum
average cost. (Compare Figure 2.20 with the longrun equilibrium of a competitive firm in Figure
2.7). In other words, firms in a competitive market produce at the efficient scale (called the minimum efficient scale) but firms in a monopolistic competition market produce less than the efficient scale of output. This implies that monopolistic competition leads to excess capacity in the long run. Excess capacity implies inefficiency because In tthe average cost would be lower with fewer firms.