lesson 7 - market power

Question 1

perefect competition

Answer 1

• many firm
• homogenous products
• free entry/exit
  -price takers (P=MR=MC)
  zero economic profit in the long run

Question 2

Monopoly

Answer 2

• one firm
• no close substitutes
• price maker (P>MR=MC)
• barriers to entry
• potential for positive economic profit in the long run

Question 3

monopolistic competition

Answer 3

• many firms
• differentiated products
• relatively easy entry/exit
  -little price setting power

Question 4

oligopoly

Answer 4

-few firms
-homogenous or differentiated products
-significant barriers to entry
- interdependence among firms
- game theory applies

Question 5

market power

Answer 5

the ability of a firm to influence the market price of a good or service - > ability to set P>MC

Question 6

sources of market power

Answer 6

• legal barriers (patents, regulations)
• structural barriers (economies of scale, control of resources, network effects)
• strategic barriers (pricing, product differentiation)

Question 7

natural monopoly

Answer 7

one firm can supply the entire market at a lower cost than multiple firms due to economies of scale. -> declining AC curve

Question 8

concentration ratio (CRn)

Answer 8

the combined market share of the top n firms
Choose an n; CRn = Share1 + Share2 + … + Sharen
E.g. CR4 = 25 + 25 + 25 + 5 = 80

Question 9

Herfindahl-Hirschman Index (HHI)

Answer 9

sum of squares of the market shares of all firms,
- gives more weight to larger firms
- higher HHI indicates greater concentration

HHI = Share1
2 + … + Sharen
2
E.g. HHI = 625 * 3 + 25 * 5 = 2,000

Question 10

Monopoly Marginal Revenue

Answer 10

-always less than price (P>MR)
- downward sloping DD curve (as they face the demand of the entire market)
- for linear demand (P=a-bQ)
-MR = a - 2bQ (bisection rule)

Question 11

Lerner Index (LI)

Answer 11

LI = (P-MC)/P ; measures the markup over MC as a percentage of price
- LI = 0 in perfect competition (as P=MC)

Question 12

Multi - Plant Monopoly

Answer 12

MR=MC1=MC2 (equal marginal cost across plants) ;
- find Qt (total quantity),
𝑄𝑇 = 𝑞1 + 𝑞2
then allocate to plants to satisfy MC equality

Question 12

Monopoly pricing rule of thumb

Answer 12

P = MC / (1 + 1/eD);
- price markup depends on elasticity of demand (eD); - monopolists operate in elastic region of demand curve (|eD| > 1).

Question 13

cartel

Answer 13

A cartel is a group of firms that explicitly collude, coordinating prices and
output levels to maximize joint profits
- Cartels are often international
- Cartels are often analyzed as multi-plant
monopolies
─ Higher marginal cost firms produce less

Question 14

Welfare Effects of Monopoly

Answer 14

• lower consumer surplus
• higher producer surplus
  -deadweight loss
• potential for rent seeking behaviour

Question 15

competition law (antitrust law)

Answer 15

aims to prevent anti-competitive practices (collusion,mergers,predatory pricing)