ABSTRACT
To arrive at the average mark-up of price over marginal cost in an industry we take the above equation for each firm i weighted by the firm’s share si, and hence can derive CSi’(l + ai)le = (p - c)/p when c = CSici. (Recall that by definition CSi = 1.) Thus the mark-up of price over marginal cost depends upon the elasticity of demand (e), an indicator of the degree of industrial concentration (Fsi2, which is labelled the Herfindahl index discussed further in the next chapter), and a measure of the degree of collusion between the firms (ai). The first two of these factors are elements of the structure of the industry. The third factor relates to the behaviour of the firms, although it may be heavily conditioned or even determined by the structure of the industry. It can be seen that as Es{ varies from zero (its value under perfect competition) to unity (its value under monopoly), the mark-up of price over marginal cost rises. When ai = 0 (for all firms), then the Coumot solution arises, and the mark-up of price over marginal cost depends on industrial concentration and the elasticity of demand. When ai = Qilqi, then Es? (1 + ai) = CS~ ‘(1 + Qi/qi) = C(Si’(l/Si)) = 1 since qi + Qi = Q and Csi = 1. Then (p - c)lp = l/e, and the outcome is one of joint profit maximisation, and is analogous to the outcome under monopoly.
