Comprehensive Study Guide: Market
Structures
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction 2
2 Monopoly (Topic 4.1) 2
2.1 Profit Maximization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 The Inverse Elasticity Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Inefficiency and Deadweight Loss . . . . . . . . . . . . . . . . . . . . . . 3
3 Price Discrimination (Topic 4.2) 3
3.1 First Degree (Perfect Price Discrimination) . . . . . . . . . . . . . . . . . 3
3.2 Second Degree (Non-Linear Pricing) . . . . . . . . . . . . . . . . . . . . . 3
3.3 Third Degree (Market Segmentation) . . . . . . . . . . . . . . . . . . . . 3
4 Oligopoly Theory 4
5 Simultaneous Oligopoly (Topic 4.3) 4
5.1 Cournot Model (Quantity Competition) . . . . . . . . . . . . . . . . . . 4
5.2 Bertrand Model (Price Competition) . . . . . . . . . . . . . . . . . . . . 4
6 Sequential Oligopoly (Topic 4.4) 5
6.1 Stackelberg Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7 Cartels (Topic 4.5) 5
8 Monopolistic Competition (Topic 4.6) 5
9 Market Concentration (Topic 4.7) 6
1
, Intermediate Microeconomics Study Guide: Market Structures
1 Introduction
In perfectly competitive markets, firms are price takers. In this module, we explore
markets where firms have **market power**—the ability to influence the market price.
We move from a single firm (Monopoly) to a few firms (Oligopoly).
2 Monopoly (Topic 4.1)
A monopoly exists when a single firm serves the entire market. The firm faces the
downward-sloping market demand curve.
2.1 Profit Maximization
The monopolist chooses output y to maximize profit:
max π = p(y)y − c(y)
y
where r(y) = p(y)y is Total Revenue.
First Order Condition (FOC):
M R(y) = M C(y)
Unlike perfect competition (where P = M C), here Marginal Revenue (M R) is less than
Price (P ).
dp
M R = p(y) + y
dy
dp
Because the demand curve slopes downward ( dy < 0), selling one extra unit requires
lowering the price on all units sold.
2.2 The Inverse Elasticity Rule
We can rewrite the maximization condition using the price elasticity of demand (ϵ):
Markup Pricing Rule
1
p(y) 1 − = M C(y)
|ϵ(y)|
Implications:
• A monopolist never produces on the inelastic portion of the demand curve (|ϵ| < 1),
because M R would be negative.
2
Structures
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction 2
2 Monopoly (Topic 4.1) 2
2.1 Profit Maximization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 The Inverse Elasticity Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Inefficiency and Deadweight Loss . . . . . . . . . . . . . . . . . . . . . . 3
3 Price Discrimination (Topic 4.2) 3
3.1 First Degree (Perfect Price Discrimination) . . . . . . . . . . . . . . . . . 3
3.2 Second Degree (Non-Linear Pricing) . . . . . . . . . . . . . . . . . . . . . 3
3.3 Third Degree (Market Segmentation) . . . . . . . . . . . . . . . . . . . . 3
4 Oligopoly Theory 4
5 Simultaneous Oligopoly (Topic 4.3) 4
5.1 Cournot Model (Quantity Competition) . . . . . . . . . . . . . . . . . . 4
5.2 Bertrand Model (Price Competition) . . . . . . . . . . . . . . . . . . . . 4
6 Sequential Oligopoly (Topic 4.4) 5
6.1 Stackelberg Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7 Cartels (Topic 4.5) 5
8 Monopolistic Competition (Topic 4.6) 5
9 Market Concentration (Topic 4.7) 6
1
, Intermediate Microeconomics Study Guide: Market Structures
1 Introduction
In perfectly competitive markets, firms are price takers. In this module, we explore
markets where firms have **market power**—the ability to influence the market price.
We move from a single firm (Monopoly) to a few firms (Oligopoly).
2 Monopoly (Topic 4.1)
A monopoly exists when a single firm serves the entire market. The firm faces the
downward-sloping market demand curve.
2.1 Profit Maximization
The monopolist chooses output y to maximize profit:
max π = p(y)y − c(y)
y
where r(y) = p(y)y is Total Revenue.
First Order Condition (FOC):
M R(y) = M C(y)
Unlike perfect competition (where P = M C), here Marginal Revenue (M R) is less than
Price (P ).
dp
M R = p(y) + y
dy
dp
Because the demand curve slopes downward ( dy < 0), selling one extra unit requires
lowering the price on all units sold.
2.2 The Inverse Elasticity Rule
We can rewrite the maximization condition using the price elasticity of demand (ϵ):
Markup Pricing Rule
1
p(y) 1 − = M C(y)
|ϵ(y)|
Implications:
• A monopolist never produces on the inelastic portion of the demand curve (|ϵ| < 1),
because M R would be negative.
2
