Basic Models of Price Determination

Abstract

We start by assuming that products are undifferentiated, that the costs of all suppliers are identical and that all suppliers initially have equal market shares. We further assume that the objective of all firms is to earn an adequate rate of return on capital employed: the definition of ‘adequate’ being the same for all firms; however, all firms act independently of each other, that is to say there is no co-ordination on prices, quantities to be supplied, etc. It will be seen that under these conditions the firm’s discretion would be extremely limited.