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7: Firm Competition and Market Structure
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- 7.1: Why Perfect Competition Usually Does Not Happen
- The perfect competition model (and its variants like monopolistic competition and contestable markets) represents an ideal operation of a market. As we noted in Chapter 6, not only do the conditions of these models encourage aggressive competition that keeps prices as low as possible for buyers, but the resulting dynamics create the greatest value for all participants in the market in terms of surplus for consumers and producers.
- 7.2: Monopoly
- Often, the main deterrent to a highly competitive market is market power possessed by sellers. In this section, we will consider the strongest form of seller market power, called a monopoly. In a monopoly there is only one seller, called a monopolist.
- 7.3: Oligopoly and Cartels
- Unless a monopoly is allowed to exist due to a government license or protection from a strong patent, markets have at least a few sellers. When a market has multiple sellers, at least some of which provide a significant portion of sales and recognize (like the monopolist) that their decisions on output volume will have an effect on market price, the arrangement is called an oligopoly.
- 7.4: Production Decisions in Noncartel Oligopolies
- Oligopolies exist widely in modern economies. However, most do not function as cartels. Still, since these markets have relatively few sellers and each has a significant share of market sales, in many cases the total market production by oligopoly firms is less than would be expected if the market were perfectly competitive, and prices will be somewhat higher.
- 7.5: Seller Concentration
- Although high seller concentration in itself is not sufficient for exercise of seller power, it is generally a necessary condition and constitutes a potential for the exercise of seller power in the future. In this section, we will consider two numerical measures of market concentration: concentration ratios and the Herfindahl-Hirschmann Index (HHI).
- 7.6: Competing in Tight Oligopolies- Pricing Strategies
- Economists have employed the applied mathematical tools of game theory to try to capture the dynamics of oligopoly markets. Game theory is outside the scope of this text, but we will consider some of the insights gained from the application of game theory in discussions about strategy in this and the following sections.
- 7.7: Competing in Tight Oligopolies - Nonpricing Strategies
- Oligopoly firms also use a number of strategies that involve measures other than pricing to compete and maintain market power. Some of these strategies try to build barriers to entry by new entrants, whereas the intention of other measures is to distinguish the firm from other existing competitors.
- 7.8: Buyer Power
- The bulk of this chapter looked at facets of market power that is possessed and exploited by sellers. However, in markets with a few buyers that individually make a sizeable fraction of total market purchases, buyers can exercise power that will influence the market price and quantity.