Welfare Economics of Market Power

Question 1

Describe a perfect competition market

Answer 1

A market with many many firms, who sell homogeneous goods at a price determined for them by the market (price takers). They obtain zero profit at P=MC and have an efficiency gain of increased consumer surplus

Question 2

Define market power

Answer 2

The ability to raise price above P=MC

e.g. demand and supply side substitution

Question 3

Describe a monopoly setting

Answer 3

Firms are price makers as they have a significant amount of market share, allowing them to have an effect on the price without affecting demand too much - therefore, relating to elasticities of demand. See proof of lerner index in measuring market power.

Question 4

Why is a monopoly case inefficient

Answer 4

loss of CS and gain of producer surplus

Question 5

Benefits to a monopoly

Answer 5

Williamson Trade-off states that when a firm gets bigger they obtain cost advantages so MC falls…allowing for greater gains to compensate for the efficiency losses. Often argued that most efficiency gains are passed onto consumers.