The Theory of the Market Flashcards
Give an outline of the Du-Pont Cellophane Monopolization case in 1947
Du Pont’s average market share for cellophane was 76% - were they liable for monopolising the market? No - Court Rulings suggested that the cellophane market was not the relevant market = flexible packaging was instead., of which Du Pont’s sales did not exceed 18%. Case dismissed.
What does the MARKET DEFINITION entail?
Concepts of markets - economic vs. antitrust
Physical product - product dimension, geographical dimension
What is an economic market?
A set of products, a set of buyers and sellers, a geographic region in which buyers and sellers interact to determine price for each product.
When is it possible to define an economic market?
If there is a MARKED GAP in the chain of substitutes between products included in the industry and those excluded. And those included are close substitutes.
- the marked gap may not always exist - can become a blur through demand-side subsitution
What is an anti-trust market?
Deals with the problem of arbitrariness of the market definition. Uses the HYPOTHETICAL MONOPOLY TEST
What is the hypothetical monopoly test?
A market is defined as a product or group of products and a geographic region in which a product is sold such that a hypothetical profit-maximising firm would impose at least a ‘small but significant and non-transitory’ (SSNIP) increase in the price.Usually defined as a price increase of 5% for at least 12 months.
Define a relevant market
A relevant market is a group of products and geographic area that is no bigger than necessary to satisfy the test
What’s the difference between Economic markets and Anti-trust markets in determining market power?
Anti-trust law is not only concerned about the pricing power but also the exclusionary power
What are the constraints to market power?
Demand and supply-side substitution and Barriers to entry
What does using market share as a proxy for market power require?
Appropriate definition of markets
i.e. too narrow or too broad
Do market shares provide useful information about market power?
High market shares are a necessary but not sufficient condition for finding market power
How do demand elasticities help?
- Cross price elasticity estimates indicate where the loss of sales go when the price is raised
- The prediction of the hypothetical monopoly pricing relies on appropriate estimation of own price elasticity and cross price elasticity
