The Master Equation for Imperfect Competition and Increasing Returns to Scale Says that the degree of returns to scale is equal to the desired markup ratio. The degree of returns to scale, gamma, is equal to average cost over marginal cost. The desired markup ratio, mu, is equal to average revenue over marginal revenue. "Average revenue" is an exotic name for price. Free entry and exit pushes average revenue and average cost together. That is, price and average cost become equal. Price adjustment equates marginal revenue and marginal cost. So the combination of free entry and exit and price adjustment makes the ratio of average revenue over marginal revenue equal to the ratio of average cost over marginal cost. That is, degree of returns to scale gamma equals desired markup ratio mu. This is a remarkable result: the degree of imperfect competition as measured by the desired markup ratio is equal to the degree of increasing returns to scale. Imperfect competition and increasing returns to scale not only go together, they match quantitatively.