Notesale: Turn your study into money

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HULT International Business School
Economic Theory and Application (ECN102) - A
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- Said to be the polar ≠ of competition
- Monopoly can be exerted through:
- legal barriers (eg
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A monopolistic firm takes into account that its output
decision can affect price; its marginal revenue is not its
price
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Firms are too small to affect the
price, it does not take into account
the effect of its output decision on
the price it receives

In M markets, the firm faces no competitors and does chat
is in the best interest of the sole firm
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• One firm
• Entry barriers (legal, social, economic) prevent
competition
• No close substitutes for the firms products
• Abnormal profits are possible, the firm faces downward
sloping demand curve and has room to choice (price or
supply)
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• Products are perfect substitutes
• Firms face a horizontal demand
curve
• So economic forces have full
reign, firms are productively and
market is is allocatively efficient
and consumer has maximum
benefits

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Market structures vary (a spectrum)
The level of concentration is key
The two extreme models are Monopoly and Perfect Competition
Both are rare

- Concentration Measures:
1

The HERFINDAHL-HISCHMAN INDEX

The Concentration ratio

• Squaring the % market share of each firm in the market and
summing these numbers
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The index can be as high as 10,000 if the
market is a pure monopoly (100*)
• The lower the index the more competitive the market

Share of top 4 or 5
companies
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(5) Average total cost ➔
(6) Profit ➔

Both Monopoly and Perfect competition are pure extremes which are rare
Perfect competition model is defined by extreme pre-conditions

↓
Real business and markets have some degree of ‘imperfection’
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and does not try
to model concentration

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