Basic Producer Theory

Abstract

This chapter covers basic producer theory, including demand and supply, cost curves, and the firm’s profit maximizing decision rule for production. The two types of market structures to be covered are perfectly competitive markets and oligopolies. The music industry is an oligopoly market with a handful of large firms that control the market. There are several barriers to entry that enable these firms to maintain persistent economic profits, namely high startup costs, ownership of intellectual property, and economies of scale. There are also game theoretic implications for firms in an oligopoly, and basic games of strategy (Prisoner’s Dilemma and the Cournot Model) will be discussed. A thorough grounding in producer theory is necessary to understand the production of music.