Sources of Market Power

Question 1

What does the concept of competitive markets fail to explain

Answer 1

• Why the number of firms differs across to explain
• Why firms in different industries have different sizes
• Why profitabilities differ across industries

Question 2

What else do firms spend on other than production

Answer 2

Advertising, product differentiation, R +D, technological and product innovations

Question 3

Which market has homogenous products

Answer 3

Perfect competition

Question 4

What does SCP paradigm outline

Answer 4

Performance depends on the conduct of firms that in turn depends on market structure

Question 5

What decision come under conduct of firms

Answer 5

Pricing Behaviour
Production Strategy
R + D
Advertising

Question 6

What are key performance metrics for firms

Answer 6

Productive and allocative efficiency
Technological progress
Employment
Product Quality
Profits

Question 7

What is market power

Answer 7

The ability of a firm to profitably raise the market price above marginal costs

Question 8

What does a decrease in market power increase

Answer 8

The number of competing firms

Question 9

Key examples of institutional entry/exit barriers

Answer 9

-Licensing
-Zoning
-Patents
-Tariffs

Question 10

Examples of Non Strategic Economic entry/exit barriers

Answer 10

-Absolute cost advantage
-Sunk costs
-Scale economies

Question 11

Some examples of strategic economic entry/exit barriers

Answer 11

-Collusion
- Limit pricing
- Reputation
-Advertising

Question 12

What is zoning

Answer 12

When the government allows certain economic activity but not others on specified land thus allowing monopoly over that land

Question 13

What is licensing

Answer 13

Regulation requiring a license to pursue a particular occupation

Question 14

What are patents

Answer 14

Intellectual property rights that stop other firms from producing a product or using patented technology

Question 15

What is an absolute cost advantage

Answer 15

When a firm can provide more of a g/s for the same cost

Question 16

What are networks

Answer 16

Where the value of a good increases with the number of consumers

Question 17

What is vertical integration

Answer 17

Where one firm combines several stages of the production process

Question 18

What is basic research

Answer 18

Work done to acquire new knowledge without any particular application

Question 19

What is applied research

Answer 19

Application of the existing knowledge to problems involved in creating new products or processes

Question 20

What is innovation

Answer 20

Application of new ideas to products and processes or anything to do with a firm that increases value

Question 21

What are the two types of innovation

Answer 21

Product innovation- the introduction of a new product
Process innovation- introduction of a new process for making or delivering goods and services

Question 22

What is R and D spending

Answer 22

The monetary value of resources a company spent on R and D

Question 23

What is R and D intensity equation for a firm

Answer 23

R and D expenditure/ Total revenue

Question 24

What is R and D intensity equation for a country

Answer 24

R and D expenditure/ GDP

Question 25

What are the 3 biggest R and D spending industries

Answer 25

- hardware producers - Software and internet - Health industries

Question 26

What are the 5 problems with innovation

Answer 26

1) Knowledge is a public good, high sunk costs but marginal costs are almost knowledge 2) Spillover effect- undersupplied as social benefits are higher than private benefits 3) R and D is indivisible, risky and hard to obtain enough capital 4) A patent race can lead to socially wasteful R and D spending 5) Intellectual property rights enhance monopoly power- inefficient outcome

Question 27

5 solutions to innovation problems

Answer 27

- Public provision of new knowledge, gov subsidies/ provision for private research - Running joint ventures to internalise spillovers - Protecting IPR so firms have incentives to innovate - Government regulation to prevent inefficiencies from monopoly patentees - License market

Question 28

What shape grpah is the effect of market concentration and competition on R and D

Answer 28

N shaped

Question 29

How is market structure and innovation a two way relationship

Answer 29

Market structure affects firms' incentives to innovate but innovations can also change market structures

Question 30

What are the potential gains from innovation

Answer 30

- Larger market share - Greater profits

Question 31

What are the opportunities to innovate

Answer 31

- The likelihood of success, facilities, innovation potential and financial capital

Question 32

What are the gains and opportunities like to innovate for a monopoly

Answer 32

- Small gains as already earn good profits - Opportunities are good as can finance it but has no one to compete with

Question 33

What are the gains and opportunities to innovate in highly competitive industries

Answer 33

- Potential gains are large, can raise profits from zero to monopoly level - Opportunities are very low as cannot finance it, capacities and resources are low

Question 34

What are the gains and opportunities to innovate in concentrated industries

Answer 34

- Gains are large, can become a monopoly or dominant firm - Opportunities are favourable as can finance it and in oligopolies it is easier to negotiate and collaborate