Micro Theory, 2005 Chapter 2 Industrial Organization References: Varian(1992)Chapters 13-16 and MWG(1995)Chapter 12 The firm is assumed to maximize profit, which implies f MR(")=MC(y*) This formula applies to any type of firms in the output market 1. Competitive Output Market Competitive industry: Many firms: Firms are independent of each other in decision making Identical product: Each firm faces a horizontal demand curve at the market price Free entry: Zero profit in the long run A competitive firm takes the market price as given. For a given market price p, firm i faces demand. t if Pi>p 0, oo] if Pi=p if pi< p For the supply side, FOC and SOC: t (y)>0. (22)Chapter 2 Industrial Organization Micro Theory, 2005 References: Varian (1992) Chapters 13—16 and MWG (1995) Chapter 12. The firm is assumed to maximize profit, which implies † MR(y∗ ) = MC(y∗ ). (2.1) This formula applies to any type of firms in the output market. 1. Competitive Output Market Competitive industry: • Many firms: Firms are independent of each other in decision making. • Identical product: Each firm faces a horizontal demand curve at the market price. • Free entry: Zero profit in the long run. A competitive firm takes the market price as given. For a given market price p, firm i faces demand: † qd i = ⎧ ⎪⎪⎪⎪⎪⎨ ⎪⎪⎪⎪⎪⎩ 0 if pi > p [0, ∞] if pi = p ∞ if pi < p. For the supply side, FOC and SOC: † p = c0 (yi), c00(yi) > 0. (2.2) 2—1