Central Questions

Question 1

What is market power?

Answer 1

The ability to set prices above cost specifically the incremental cost or the marginal cost that is ; the cost of producing one extra unit of output.

Question 2

When is marginal cost equal to unit cost?

Answer 2

When the costs are proportional to output

Question 3

How can we obtain the extent of market power, given costs are proportional to output ?

Answer 3

When the given costs are proportional to output then the extent of markt power can be derived on the basis of the data available on
1. Profit rate
2. Output
3. Prices

Question 4

How can we say that the extent of market power is the lowest in the American Economy?

Answer 4

Since the profit rates is relatively lowest in American economy.

Question 5

Why can’t the market power ever be significant with free market entry?

Answer 5

The market power can never be significant because the existing firm may find it profitable to set prices above cost till the time a new firm may enter and lower its prices leading to the shift in market power.

Question 6

When can the extent of market power be significant. Explain with reference to the US airline industry?

Answer 6

1. The average fares in 43 large airport were considered
2. Around 31% extra was being paid off by the fliers at airports where only a few airlines held a tight control over take off and landing slots.
3. This was possible since these fliers were paying 31% extra at these airports than the remaining 33.
4. Therefore, the airlines that were able to control the critical assets of airport hold a significant degree.

Question 7

What is the most important component of a firm’s value - maximization strategy?

Answer 7

Acquiring and maintaining power.