Market Consists of All Firms Essay

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Market power can exist when there are substantial barriers to entry into the indus-try. Expectations about incumbent reactions, incumbent advantages, and exit costs all can serve as entry barriers.

The extreme case of a firm with market power is monopoly, where the industry con-sists of only one firm. Here, industry and firm demand curves are one and the same. In contrast to competitive markets, consumers pay more than marginal cost and the firm earns economic profits. Output is restricted from competitive levels. With a monopoly, not all the potential gains from trade are exhausted.

Monopolistic competition is a hybrid between competition and monopoly. It is like mo-nopoly in that firms under both market structures face downward-sloping demand curves. Market power comes from differentiated products. Examples include the toothpaste, golf ball, tennis racket, and shampoo markets.

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The analyses of output and pricing policies are similar in the two cases. The difference between monopoly and monopolistic competition is that in monopolistic competition, economic profits invite entry that limits profits.

In oligopolistic markets, only a few firms account for most production. Products may or may not be differentiated. Firms can earn substantial profits. However, these profits can be eliminated through competition among existing firms in the industry. To analyze output and pricing decisions in oligopolistic industries, we use the con-cept of a Nash equilibrium: A Nash equilibrium exists when each firm is doing the best it can given the actions of its rivals. In the Cournot model, each firm treats the output level of its competitor as fixed and then decides how much to produce. In equilibrium, firms.....

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