Market structures: pricing by power
Introduced| English | Meaning |
|---|---|
| perfect competition/ˈpɜːfekt ˌkɒmpəˈtɪʃn/ | perfect competition |
| monopoly/məˈnɒpəli/ | A market structure in which a single seller supplies a good or service with no close substitutes. |
| deadweight loss/ˈdedweɪt lɒs/ | The loss of total economic surplus when a market produces an inefficient quantity. |
| monopolistic competition/məˈnɒpəlɪstɪk ˌkɒmpəˈtɪʃn/ | A market structure with many firms offering differentiated products and relatively easy entry and exit. |
| oligopoly/ˌɒlɪˈɡɒpəli/ | A market dominated by a small number of interdependent large firms. |
Same bakery, four different markets
- Put Nimbus in a street of identical bakeries and it has no power over price. Give it the whole city behind a concession and it chooses the price itself.
- Between those worlds sit the two structures real firms usually live in. This lesson predicts price and output in each — and prices the difference.
Perfect competition: the price taker
- Perfect competition 完全竞争 means many firms, an identical product, free entry: each bakery faces the market's £4 as a fact of nature. Its own demand curve is flat at £4 — price, average revenue and marginal revenue in one line.
- Nimbus's answer (lesson 0304): produce 520 loaves where its rising MC reaches £4, earn $£1{,}160$ for the day — and know that free entry grinds that profit toward zero in the long run.
Why is a perfectly competitive firm's demand curve flat?
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With many sellers of an identical good, the firm can sell any amount at the market price — and nothing at a penny more. Price, AR and MR are one flat line.
Monopoly: choosing the price
- A monopoly 垄断 faces the whole market demand curve $P = 12 - Q/100$, so selling one more loaf means lowering the price on ALL loaves: marginal revenue is $MR = 12 - Q/50$, twice as steep.
- Set $MR = MC$: with the industry's marginal cost flat at £2 (a simplification — the point is the markup rule), $12 - Q/50 = 2$ gives $Q = 500$ at $P = £7$.
On market demand $P = 12 - Q/100$, what is MR at Q = 500, in £?
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$MR = 12 - Q/50 = 12 - 10 = £2$ — below the £7 price, because selling one more loaf means cutting the price on every loaf. MR sitting exactly on MC = 2 here is no accident: that equality IS the monopolist's choice.
With $MR = 12 - Q/50$ and $MC = 2$, what output does the monopolist choose, in loaves?
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$12 - Q/50 = 2$ gives $Q = 500$, and the demand price there is $12 - 5 = £7$.
The price of monopoly power
- The Lerner index $(P - MC)/P = (7-2)/7 = 0.71$ measures markup power — zero for a price taker.
- Buyers between loaf 500 and loaf 1,000 value bread above its £2 cost but below £7. Those trades never happen: a deadweight loss 无谓损失 of $\tfrac{1}{2}(7-2)(1000-500) = £1{,}250$ a day. The monopoly profit is a transfer; the triangle is simply gone.
Which structure is this market?
Structure turns on two questions: does a firm face a given price, and can profits be kept? Sort each market before predicting its price.
The monopolist charges £7 with marginal cost £2. What is the Lerner index, to two decimals?
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$(P - MC)/P = 5/7 = 0.71$ — market power in one number; a price taker scores exactly zero.
On this diagram, price meets MC at Q = 1,000. What is the deadweight loss at Q = 500, P = 7, in £?
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The triangle runs from 500 to 1,000 between demand and MC = 2: $\frac{1}{2} \times (7-2) \times 500 = £1{,}250$ a day.
Nimbus's actual world: monopolistic competition
- Monopolistic competition 垄断竞争: many sellers, each with a distinct loaf (sourdough, rye, brioche), free entry. Distinctiveness gives each bakery a small markup; free entry makes the markup exactly pay for the cost of variety.
- The long-run condition is not $P = MC$ but $P = ATC$ with $P > MC$: entry ends when Nimbus's £1,160 has been competed to zero — tangency, not crossing.
In long-run monopolistic competition, entry continues until what holds?
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Differentiation keeps P above MC (the markup pays for variety), but free entry pushes profit to zero: the demand curve ends tangent to ATC.
Oligopoly: few and watching
- Oligopoly 寡头垄断 means few enough sellers that each one's best price depends on the others' prices — strategy enters, and with it game theory.
- The taste of it: two bakeries choosing prices simultaneously each do better charging £5 than £4 only if the other holds still; if both chase, both land back near £4. Interdependence, not a curve, is the model.
In an oligopoly, each firm can pick its best price without looking at its rivals.
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Few sellers means interdependence — each firm's best move depends on the others' moves, which is why game theory, not a single supply curve, models it.
Match each structure to its long-run pricing signature.
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Two questions set the signature: pricing power (does P exceed MC?) and entry (does profit survive?).
Three structure slips
- "A monopolist charges the highest price it can." It charges the price of its $MR = MC$ quantity — far below the top of the demand curve, because selling more at less can beat selling one at most.
- Reading deadweight loss off the wrong quantities. The triangle runs from the monopoly quantity to the quantity where price meets MARGINAL cost, on the same cost curve.
- Treating the four structures as a moral ladder. They are predictions about price and output; judge each case by outcomes, including variety.
Recap
- Price taker: flat demand, $P = MC$, zero long-run profit.
- Monopolist: $MR = MC$ from market demand, markup by the Lerner rule, deadweight triangle beyond.
- Monopolistic competition: markup yes, economic profit no — entry competes it to $P = ATC$.