CFA L1 / Econ / M1. Market Structures
Module 1 · Economics

Firms and Market Structures

EN: Profit maximization, four market structures, and concentration measures.
VN: Tối đa lợi nhuận, bốn cấu trúc thị trường, đo độ tập trung.

1. Profit Maximization Rule Core

About: MR = MC is the profit-maximizing output rule across all market structures. As long as the next unit adds more revenue than cost, produce it. Below P = AVC firms shut down short-run.Tóm tắt: MR = MC là quy tắc tối đa lợi nhuận. Sản xuất chừng nào MR > MC. P < AVC: ngừng sản xuất ngắn hạn.

EN: Profit is maximized where marginal revenue equals marginal cost.
VN: Lợi nhuận tối đa khi MR = MC.

\[ MR = MC \]

Components

  • MR Marginal revenue — change in TR per extra unit.
  • MC Marginal cost — change in TC per extra unit.
  • Shut-down Short-run: P < AVC. Long-run: P < ATC.
Practice problem

A firm's MR is $30; MC is $25 at current output. What should it do?

Show solution
MR > MC → next unit adds more revenue than cost.
Increase output until MR = MC.
Increase output (more units add to profit).

2. Four Market Structures Concept

About: Four structures — perfect competition, monopolistic competition, oligopoly, monopoly — differ in number of firms, product differentiation, entry barriers, and pricing power. Determines profitability and competitive dynamics.Tóm tắt: 4 cấu trúc khác nhau ở số doanh nghiệp, mức độ khác biệt sản phẩm, rào cản gia nhập, sức mạnh định giá.

Comparison

  • Perf. comp. Many firms, identical product, P = MC = MR, no pricing power.
  • Mon. comp. Many firms, differentiated product, downward-sloping demand, some pricing power.
  • Oligopoly Few firms, strategic interaction (Cournot, Stackelberg, kinked demand).
  • Monopoly One firm, high entry barriers, MR = MC sets quantity, then price from demand curve.

3. Concentration Ratio (CRN) Core

About: CR_N sums market shares of top N firms (commonly N=4). Quick concentration measure but ignores distribution among the top firms — HHI corrects this.Tóm tắt: CR_N cộng thị phần top N (thường N=4). Đo nhanh độ tập trung nhưng bỏ qua phân bố — HHI khắc phục.
\[ CR_N = \sum_{i=1}^{N} s_i \]

Components

  • \(s_i\) Market share (%) of firm i, sorted from largest.
  • N Top N firms (commonly N = 4 for CR4).
Practice problem

Top 4 firms have shares 25%, 20%, 15%, 10%. Compute CR4.

Show solution
CR4 = 25 + 20 + 15 + 10
CR4 = 70%

4. Herfindahl-Hirschman Index (HHI) Core

About: HHI sums squared market shares — gives more weight to larger firms. DOJ thresholds: < 1500 unconcentrated; 1500–2500 moderate; > 2500 highly concentrated. Used in antitrust merger reviews.Tóm tắt: HHI cộng bình phương thị phần — nhấn mạnh doanh nghiệp lớn. Ngưỡng DOJ: <1500/1500-2500/>2500. Dùng đánh giá M&A.
\[ HHI = \sum_{i=1}^{n} s_i^{2} \]

Interpretation (DOJ thresholds)

  • < 1500 Unconcentrated.
  • 1500–2500 Moderately concentrated.
  • > 2500 Highly concentrated.
Practice problem

An industry has 5 firms with market shares 30%, 25%, 20%, 15%, 10%. Compute CR3 and HHI.

Show solution
CR3 = 30 + 25 + 20 = 75%
HHI = 30² + 25² + 20² + 15² + 10² = 900 + 625 + 400 + 225 + 100
CR3 = 75%, HHI = 2,250 (moderately concentrated)