Market power and dominant firms

Question 1

What is important in determining market power?

Answer 1

• Market share of dominant firm
• Price elasticity of demand (Lerner)
• Xped
• Durability of products

Question 2

What strategies can a monopoly use to counteract Coase conjecture?

Answer 2

• Leasing
• Invest in reputation
• Most favoured customer clause (refund difference)
• New customers
• Reduce good’s durability

Question 3

When do consumers face excessive sameness and when do they not? why?

Answer 3

• Simultaneous entry > Firms enter together and leapfrog each other because no sunk cost F, end up not differentiated
• Sequential entry > Firms pay F to locate and relocate, so maximise differentiation to deter entry from N+1 firms

Question 4

Should competition agencies intervene when firms proliferate their brands/stores?

Answer 4

• Depends on market share
• One firm owns all firms and stops entry > antitrust concerns > essentially a cartel of firms
• If multiple firms own multiple stores/brands then okay

Question 5

What affects the degree of price competition in the market?

Answer 5

• Level of product differentiation

- Cross price elasticity of demand lower when higher differentiation

Question 6

“With differentiated products, unilateral effects are more likely when merging firms products compete more closely”

Answer 6

• In ordinary perfect competition market, prices are low due to high XPED
• Monopolist controls all prices when it owns multiple stores in 1 market
• Monopolist raises prices of all firms to raise own profits
• MPM sets prices where MC is at half and indifferent between buying from 2 firms
• The lower the original diff, the higher the difference between Pm and PN, so higher unilateral effects

Question 7

What’re the necessary conditions for a cartel, explain how industry characteristics affect a cartels ability to sustain price above competitive level

Answer 7

• Deviation must be observed/detectable
• Sufficient punishment must follow a deviation
• Difficult to sustain above certain level:
• Number of firms in market
• Size of firms in market
• Greater product differentiation

Lesser factors: Business cycle (growing market increases LT punishment) and fines (lowers cartel profits).

Question 8

Cartels more likely if product is more homogenous

Answer 8

• Lower k means lower profits in market and smaller Lerner, more to be gained by colluding
• Lower k means higher deviation profit, lower incentive to compete
• Lower k means deviation more detectable
• Higher k means higher profit so less incentive to collude

Question 9

What effect can horizontal mergers have on competition?

Answer 9

• Unilateral effects

- Coordinated effects (Increased likelihood of tactic collusion)

Question 10

Vertical restraints examples

Answer 10

• Non linear contract (per unit and fixed fee)
• Resale price maintenance
• Exclusive territory (Mini monopoly)
• Exclusive dealing
• Selective distribution

Question 11

Should RPM be banned in vertically integrated markets?

Answer 11

• Blacklisted already (Get date)
• No - can remove double marginalisation
• Explain/show diagram
• Yes - Enforces “manufacturer cartel” (Marvel 1985)
• Doesn’t matter - RRP does same job

Question 12

Competitive effects of vertical mergers

Answer 12

• Pre merger double marginalisation
• Post merger no double marginalisation
• Effects: final consumers face lower prices, concern is foreclosure of rival retailer (no interbrand competition)
• Tradeoff between foreclosure effects and removal of DM