Key Terms
General rule
If a firm produces a product with no close substitutes, it can be considered a monopoly in that market. If buyers have s
Logic
If MR > MC, producing one more unit adds more revenue than cost; profits rise. If MR < MC, the last unit cost more than
Graphically
TR is the full shaded box (P x Q). TC is the smaller inner box (AC x Q).
Example
Four firms with shares of 16, 10, 8, and 6 percent. Four-firm ratio = 40.
Allocative efficiency
Producing the quantity where marginal benefit to society equals marginal cost (P = MC in perfect competition).
Socially optimal output
Where demand crosses MC (Qe). This is what would occur under perfect competition; it is allocatively efficient.
Price discrimination
Charging different prices to different customers for the same product.
EXAMPLE
Movie theater matinees charge lower prices because the customers who attend matinees (students, retirees) reveal lower w
Antitrust laws
Laws empowering government to block mergers and break up firms to preserve competition.
Concentration ratio
Share of total market sales held by the largest firms (typically top four).
Limitation
A four-firm ratio of 80 could mean five equal firms at 20% each, or one firm at 77% and 23 tiny firms. The ratio cannot
EXAMPLE CALCULATION
Five firms each with 20% share. HHI = 5 x (20 squared) = 5 x 400 = 2,000.
Horizontal merger
Two firms selling the same product combine. Raises competition concerns most directly.
Vertical merger
A firm combines with a supplier or buyer in its production chain (input-output relationship).
Conglomerate merger
Firms with unrelated outputs combine.