In the first six weeks we described models of individual and firm choice, and given many individuals and many firms we were able to describe a competitive market.
In doing so we found that the outcomes in a competitive market allowed gains from trade – buyers who valued the products more than the sellers were trading with each other. But there were issues:
- It assumed there were lots of potential sellers of a homogenous product whose choices have no influence on the choice of other sellers.
- It assumed there were no systematic biases in consumer choices and ignored agency problems in production.
- It took for granted full, or at least symmetric, information about the product and the market.
- It didn’t incorporate the way the choice to produce or consume could impact upon a third party (externalities).
- It assumed that the institutional structure ensured the product was excludable.
These assumptions do hold in some circumstances – and even when they don’t there could be a good reason we start with it (eg assuming a systematic bias without evidence is just assuming people are stupid – which isn’t a good starting point for trying to objectively understand their choices).
But we would like to think about other types of market structures we observe.
Since then we have built some more tools to think about choice – comparative advantage, finance, game theory, and emergent macro-phenomenon.
Armed with these tools we can return to our original market model and ask “what happens when there is only one firm – with the same motives and desires as the many firms before”. This is the case of monopoly.Read more