Week 9 - Market power, Strategic pricing, and monopolies

Question 1

Perfect market power

Answer 1

– no market power, no control over product pricing

Question 2

Imperfect competition

Answer 2

firms have some degree of control over pricing of products

Question 3

Markup pricing

Answer 3

= A high markup strategy:

• ↑ markup = profits = retained earnings
• You crush competition, increase market share

Question 4

A low markup strategy:

Answer 4

• Support development of market
  o Discounts for large users (i.e. Clo)
  o Discounts to encourage purchases of complements (i.e. apple products)
• Price product below its cost (i.e. start a price war)
• Bankrupt smaller, newer competitors
• Take their market share

Question 5

Monopoly

Answer 5

Monopoly – a single seller or producer that excludes competition from providing the same product. A monopoly can dictate price changes and creates barriers for competitors to enter the marketplace.

• Price-Maker
• Sells good with the price inelastic demand
• Substantial market power

*Monopolization is increasing in the US and has been for decades

Question 6

How did it start? (Monopoly)

Answer 6

Ideological shifts in antitrust and competition policy

1. Limit consolidation of power (mergers, vertical integration)
2. Banned anti-competitive behavior (collusion, predatory pricing)
3. Public utility regulation of essential industries and natural monopolies

Question 7

What are the costs of Monopilization?

Answer 7

1) Higher prices

2) Less investment, innovation, modernization

Profits can be spent toward outperforming other companies
* Making better, cheaper products (i.e. sugar-free candy)
* Finding better production methods (i.e. distressed jeans)

Or on finding ways to exclude other companies
* buying out competitors
* below cost pricing
* lobbying

3) Lower wages (monopsony)

Question 8

Monopsony

Answer 8

a market situation in which there is only one buyer.

Question 9

The Herfindahl index

Answer 9

s a measure of the size of firms in relation to the industry they are in and is an indicator of the amount of competition among them.