Memory tricks for market structures

Requirements: many buyers/sellers, identical products, free entry/exit, perfect information. Firms are price takers. Individual firm demand is perfectly elastic. Long run: P = MR (Marginal Revenue) = MC = minimum ATC. Zero economic profit. Examples: agricultural commodities, stock markets.

Single seller, no close substitutes, barriers to entry. Faces downward-sloping market demand. MR < P always. Profit max: produce where MR = MC, charge price from demand curve. Higher price, lower quantity than perfect competition.

Many firms with differentiated products (gives some pricing power), free entry. Short run: can earn profit. Long run: entry erodes profit to zero, but NOT at minimum ATC (excess capacity). Examples: restaurants, clothing, coffee shops.

Few large firms dominate. Interdependence: each firm's decisions affect rivals. Strategic behavior analyzed with game theory. Barriers to entry. Examples: airlines, oil companies, smartphones, streaming.

Game theory studies strategic decisions when outcomes depend on others. Prisoner's Dilemma: dominant strategy to defect for both, but both defecting is worse than both cooperating. Explains cartel instability, arms races, environmental cooperation failure.

Sherman Antitrust Act (1890): prohibits monopolization and restraint of trade. Clayton Act (1914): merger restrictions. FTC enforces. Notable cases: Standard Oil (1911), AT&T (1984), Microsoft (2001), ongoing Big Tech investigations.

Requires: market power, ability to identify different WTP, ability to prevent resale. First-degree: charge each customer maximum WTP. Second-degree: quantity discounts, versioning. Third-degree: different prices to different groups.

Labor: wage = supply and demand. Wage = MRP in competitive market. Capital: interest rate equilibrates saving and investment. Land: rent determined by demand (supply perfectly inelastic). Profit: residual to entrepreneur for risk-bearing.

Traditional economics assumes rational actors. Behavioral economics (Kahneman, Thaler) shows systematic deviations. Loss aversion, anchoring, status quo bias, overconfidence, present bias. Used in nudge theory and policy design.

Every firm maximizes profit at MR = MC. Perfect competition: price taker so MR = P. Produce where P = MC. Monopoly: faces downward sloping demand. MR is below demand curve. Set MR = MC to find quantity, then go up to demand curve to find price. Monopoly charges P greater than MC creating deadweight loss. Perfect competition achieves zero economic profit in long run. Monopoly earns persistent profit due to barriers to entry.

Prisoner's Dilemma: both players have dominant strategy to defect. Both defect even though both cooperating would be better. Dominant strategy: best regardless of what the other player does. Oligopoly: firms act like prisoners — incentive to cheat on cartel agreement drives prices toward competitive level. Repeated games: cooperation can emerge. Tit-for-tat strategy: cooperate initially, then mirror opponent's last move.

First-degree: charge each buyer their exact willingness to pay — captures all consumer surplus. Second-degree: price based on quantity — bulk discounts. Third-degree: charge different prices to identifiable groups — student discounts, airline pricing by booking time. Requires: market power, ability to segment customers, prevention of resale. Airlines, colleges, and pharmaceuticals all practice third-degree price discrimination.

Occurs when fixed costs are very high and marginal costs very low — utilities, pipelines, networks. ATC continuously decreasing means a second firm cannot enter profitably. MC pricing: efficient but requires government subsidy since P is below ATC. ATC pricing: allows normal profit but creates some deadweight loss — most common for utilities. Natural monopoly regulation common in electricity, water, and sewage.

Factor demand is derived from product demand. MRP = MP times product price in competitive markets. Firm hires until MRP equals the factor price (wage, rental rate). Land supply is perfectly inelastic — rent is entirely demand-determined (pure economic rent). Human capital: investment in education raises MP and wages. Physical capital: accumulates based on investment decisions over time.

Sherman Act (1890): Section 1 prohibits price-fixing cartels (per se illegal). Section 2 prohibits monopolization. Clayton Act (1914): mergers that substantially lessen competition. FTC and DOJ Antitrust Division enforce. HHI below 1500 = competitive. 1500-2500 = moderately concentrated. Above 2500 = highly concentrated. Per se illegal: price fixing and bid rigging. Rule of reason: other practices evaluated case-by-case.