1. What is a large firm?

Most firms in our economy are small sole proprietorships with only one owner, or partnerships with several owners. Corporations, which are usually owned by many stockholders, are much less common than sole proprietorships and partnerships, but corporations produce most of the output and receive most of the revenues in the economy.

Economists usually call firms small or large relative to their markets. If there are only one or a few firms in a market, they are called "large" firms. When there are many firms in a market, they are called "small"-even if they produce millions of dollars of output.

2. What is a pricing strategy?

We've been looking at firms using the MR = MC rule to choose their output quantity and price; a pricing strategy is a way to apply this rule in more complex situations. So far, we've been assuming that firms charge the same price to all their customers. In some real-world markets, firms use price discrimination to charge different customers different prices.

Also, in some real-world markets, firms are interdependent. That is, the actions of one firm have a noticeable effect on other firms, and these other firms are likely to react. Interdependence makes it more difficult for firms to choose a profit-maximizing pricing strategy.

3. Do firms ever cooperate with rivals?

Firms often cooperate with other competitors in their market. Cooperation frequently enables firms to retain economic profits that would be lost if the firms actively competed with each other. Cooperation can take many forms, from formal cartels where sellers get together and jointly set prices and divide markets, to informal collusion or price leadership. Some actions that don't seem to be cooperative, such as cost-plus pricing and most-favored-customer (MFC) arrangements, can help reduce competition.

4. Why does the government interfere with the behavior of firms?

Although competitive markets work well for consumers, many real-world markets are not very competitive. Firms in these markets may cooperate with each other to increase their profits by raising prices. In these cases, the government may interfere with the decisions of firms by making the firms act in ways that are more competitive. Sometimes, the government may intervene in markets to provide benefits to special interest groups.