As we saw in Section 3.4, a firm’s profits are maximised where its marginal cost equals its marginal revenue: MC 5 MR. But we will want to know more than this.
What determines the amount of profit that a firm will make? Will its profits be large, or just enough for it to survive, or so low that it will be forced out of business? Will the price charged to the consumer be high or low? And, more generally, will the consumer benefit from the decisions a firm makes?
The answers to these questions depend on the amount of competition that a firm faces. A firm in a highly competitive environment will behave quite differently from a firm facing little or no competition. In particular, a firm facing competition from many other firms will have very little, if any, command over prices. Normally, under these circumstances, we would expect the consumer to gain: the competition will tend to keep prices down.
Even if a firm faces only one or two rivals, competition might be quite intense. Firms might put a lot of effort into producing more efficiently or into developing new or better products in order to gain a larger share of the market. They may, however, collude with each other to keep prices up.
In this chapter we look at different types of market and how well they serve the consumer.
