Market Structures & Industrial Organization

Market structure is how a market is organized: the number of firms, how differentiated their products are, how hard entry is, and how much firms set price.

A contestable market is one where entry and exit are cheap, so the threat of new firms holds price near cost even when only one or two sellers are active.

Market power is a firm's ability to raise price above marginal cost without losing all of its buyers, which comes from facing a downward-sloping demand curve.

Limit pricing is when an established firm sets a price low enough that entry would be unprofitable, giving up profit now to keep potential rivals out.

Predatory pricing is cutting price below cost to drive rivals out of a market, with the plan of raising price once the competition is gone.

Vertical integration is one firm owning two or more stages of the same supply chain, such as a manufacturer that also owns its parts supplier or its stores.

A horizontal merger is a combination of two firms that compete in the same market at the same stage of production, which raises concentration directly.

A conglomerate merger joins firms in unrelated markets, so the two are neither competitors nor supplier and customer to each other.

Antitrust law is the set of laws that ban price fixing, monopolizing conduct and anticompetitive mergers in order to protect competition in markets.

The Sherman Antitrust Act is the first United States antitrust law: Section 1 bans agreements that restrain trade and Section 2 bans monopolizing.

The Clayton Act is a United States antitrust law banning mergers, tying and exclusive dealing where the effect may be to substantially lessen competition.

A duopoly is a market with only two sellers, the simplest kind of oligopoly, where each firm's best price or output depends on what the other one chooses.

Switching costs are the costs a customer faces when moving from one seller to another, including fees, setup time, learning a new system and lost compatibility.

Minimum efficient scale is the smallest output at which a firm reaches the lowest point on its long-run average total cost curve.

Regulatory capture is when a regulator ends up serving the industry it oversees rather than the public, because the industry lobbies and the public does not.

Rate-of-return regulation sets a utility's prices so its revenue covers operating costs plus an approved percentage return on the capital it has invested.

A patent is a government-granted exclusive right to make, use or sell an invention for a limited time, in exchange for publishing how the invention works.