Session 7

Question 1

Monopolistic competition?

Answer 1

Many high street products fall under monopolistic competition (market with many small businesses competing, each selling differentiated products, restaurants, hotels etc.). firms don’t have to worry that small price hike will make them lose all customers

Question 2

Oligopolies?

Answer 2

(markets with only a handful of large sellers, pharmaceutical drugs, commercial aircrafts) may arise when the product is completely homogeneous

Question 3

Cons of market power?

Answer 3

• Protecting consumer welfare requires authorities to intervene in the market and prevent excessive accumulation of market power
• In Some cases, authorities do intervene and block market concentration
  -> In 2019 Siemens tried to acquire Alstom, but EU-Commission blocked it, invoking Eu Merger Regulation, to prevent dominance in train sector
• In some cases, authorities should’ve intervened:
  -> Killer acquisitions, where incumbent firms may acquire innovating start-ups to terminate their potentially competing innovations
  ->Social media platform mergers
• Traditional criteria triggering authority intervention often overemphasize:
  -> Market share: Will the merger lead to a significant rise in the largest company’s market share?
  -> Prices: How might the merger impact prices and, consequently, consumer welfare?

Question 4

Pros of market power?

Answer 4

• At larger firms, innovation in production processes and products becomes more feasible due to economics of scale, increased R&D resources, and the capacity to undertake significant infrastructure projects (Apple invested $150 million to develop original I-phone)
• Firms are also more inclined to innovate if they can reap the benefits of their innovations, e.g., through patents (sewing machine innovation in the 19th cent. Stagnated when there was a patent pool)

Question 5

Standard frameworks of Oligopoly?

Answer 5

• Cournot (quantity) competition is more common when production processes are resource-intensive and storage is expensive
  -> Commercial aircrafts
• Conversely, Bertrand (price) competition is more likely when production and storage are more flexible
  -> Pharmaceutical drugs

Question 6

Bertrand Paradox?

Answer 6

under Bertrand competition, just two sellers can produce an outcome same as perfect competition

Question 7

Monopsony power? What can be done for worker in monopsony?

Answer 7

a business using its market power as a major buyer of labor to pay lower prices, including lower wage.
- Unionize and strike
- Minimum wage laws