Reading 15 The Firm and Market Structures (Intro)
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The purpose of this reading is to build an understanding of the importance of market structure.
As different market structures
result in different sets of choices facing a firm’s decision makers, an understanding of market structure is a powerful tool in analyzing
issues such as a firm’s pricing of its products
and, more broadly, its potential to increase profitability
. In the long run, a firm’s profitability will be determined by the forces associated with the market structure within which it operates. In a highly competitive market, long-run profits will be driven down by the forces of competition. In less competitive markets, large profits are possible even in the long run; in the short run, any outcome is possible. Therefore, understanding the forces behind the market structure will aid the financial analyst in determining firms’ short- and long-term prospects.