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  • Print publication year: 2016
  • Online publication date: May 2018

10 - Firm production under idealized competitive conditions

from Book IV - Competitive and monopoly market structures


Economists understand by the term market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality, easily and quickly.

Augustin Cournot

Chapters 7– 9 largely dealt separately with the two sides of markets – consumers and producers. We devised graphic means of representing consumer preferences (the demand curve) and producer costs (the average and marginal cost curves). This chapter brings demand and cost analysis together in a way that allows us to examine how individual firms react to consumer demand in competitive markets. Our focus is on a highly competitive market structure. We investigate an intriguing question: at the maximum, how much can competitive markets contribute to consumer welfare?

We do not attempt to give a full description of a real-world competitive market setting. Markets are too diverse for such a description to be very useful. Rather, our aim is to devise a theoretical framework that can enable us to think about how competitive markets work in general, as a constructive behavioral force. Although our model cannot tell much that is specific about real-world markets, it provides a basis for predicting the general direction of changes in market prices and output.

Through the analysis in Part A of this chapter, we should gain a deeper understanding of the meaning and competitive foundations of the market forces of supply and demand and of market efficiency. We can see how the absence of restrictions on entry can impose intensive pressures on existing producers to contain their costs or be replaced.

In Part B, we explain how getting the sizes of teams and their pay incentives right can be crucial to firms’ survivability when they face intense competitive pressures. At the end of this chapter we explain how “perfect competition” is not nearly as perfect, and maybe even “efficient,” as conventional microeconomic theory suggests. In Chapter 11, contrary to much conventional wisdom, we explain how “monopoly market power” can be “less bad” than conventional theory suggests, or that monopoly pricing power can, within limits, be a creative force in product development, meaning it can be a “creative force” largely underappreciated in antitrust law.

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