Firms with market power

Question

Quizplus · Accepted Answer

Firms with market power (i.e. monopoly or oligopoly) aim to maximize their profits, which can lead to higher prices and lower output, thus failing to maximize social surplus. They may also set prices above marginal cost, so they do not produce where P=MC. While they may face downward sloping average cost curves, this is not necessary for them to have market power. Similarly, while they may face downward sloping marginal cost curves, these curves do not determine their pricing decisions.

Firms with Market Power