Introduction Flashcards
Market Power
The ability to set prices above marginal cost (the cost of producing an additional unit)
How do firms acquire market power?
1) Legal protection e.g. Patents
2) Prefatory Pricing - charging a price below your rivals to drive out competition
Implications of market power
1) Transfer effect - high market power transfers high prices to the consumer
2) High prices resemble allocative inefficiency for example, high prices may deter consumers from purchasing the food or service. This lost output is allocative inefficiency from market power.
3) Productive inefficiency (the increase in costs from market power) - where competition reduces the need to be cost efficient.
4) Rent seeking- resources spent attempting to influence policy makers/decision-makers.
5) Dynamic efficiency - (argument made by Schumpeter and the Austrian school) market power is a precondition for technological progress.
Public Policy
Public policy is to avoid the negative consequences of market power.
Public policy divided into two areas:
1) Regulation: regulators bear oversight of firms that detain monopoly or near-monopoly power.
2) Antitrust: prevent firms from taking actions that increase market power in a detrimental way.
Chicago school
They believe that in a world of free competition, market power is not significant and only arises from government intervention
Industrial policy
This is very different to regulation of antitrust, which look to promote competition.
Industrial Policy looks to strengthen the market position of a firm or industry with respect to foreign firms.
Structure-conduct-performance paradigm
This is a framework to analyse industries.
1) Market structure: number of buyers and sellers, degree of product differentiation etc.
2) Conduct of firms in the industry: Pricing, product positioning, advertising
3) how competitive the industry is
Market structure determines firm conduct, which in turn determines industry and firm performance.
Causality also works in the reverse direction.
