7.5 Market Structure

When making their horizontal and vertical decisions, managers need to take account of the behavior of actual and potential rival firms, which affect the profit function the manager’s firm faces. So far, we have implicitly ignored the role of other firms. However, a firm’s manager must take into account how its profit is affected by rival firms’ output levels, the prices rivals set, or whether additional firms are likely to enter the market if the firm makes a large profit.

How rivals behave depends on the organization of the industry in which the firms operate. A firm will behave differently if it is one of a very large number of firms rather than the only firm in the market. The behavior of firms depends on the market structure ...

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