Market Power And Monopoly Flashcards
What is market power
When a firms production decisions affect the market price.
How do firms maintain market power
By barriers to entry like natural monopolies, switching costs, product differentiation and an absolute cost advantage of key inputs
Why would monopolies produce less
Because they create artificial scarcity driving up the price so they gain more revenue
At what point does a monopoly maximize its profit when there is a decreasing return to scale
When marginal cost equals marginal revenue
What is the Lerner index
It computes how much a monopoly should mark up its price for profit maximization. Greater inelasticity of demand means higher Lerner index and thus markup
How does firms with market power reactions to economic shocks differently from price takers
They react in the same direction but with lesser magnitudes except for consumer preferences where they react more strongly as this changes the elasticity of demand and thus their marginal revenues
What is utility affected by exercising market power
Yes just like governments transfers producer surplus monopolies transfer consumer surplus which creates a dead weight loss.
When is deadweight loss the greatest when exercising market power
When consumers are not very price sensitive and demand curve is steep
Can market power be good
In some cases it can encourage firms ti rnd more so it can promote innovation
Give examples of anti trust laws
Ban in price collusion and rules regarding mergers and aquisitions
