Week 5: Market Power and Competition Policy Flashcards
(18 cards)
What is market power?
Traditionally the ability to raise prices; today it reflects the ability of a company or group of companies to control prices and other aspects of the market.
What are the sources of market power?
- Control over a resource
- Government granted monopolies
- External growth
- Natural monopolies
- Barriers to entry
What is the role of patents in market power?
Patents grant inventors exclusive rights to their inventions for a set period, usually 20 years.
What do copyrights protect?
Original works like books and music, giving creators exclusive rights for their lifetime plus 70 years.
What is the difference between mergers and acquisitions?
- Mergers: combination of two companies into one
- Acquisitions: one company purchasing another
In a competitive market, what is the relationship between price and marginal cost?
P = MR = MC
In a monopoly, how does price compare to marginal cost?
P > MR = MC
What is deadweight loss in the context of monopolies?
It occurs when a monopolist keeps quantity artificially low and sets price too high.
What is price discrimination?
Charging different prices to consumers based on their willingness to pay.
What is a monopsony?
A situation where a single buyer has market power and decides the quantity demanded.
What are the characteristics of traditional monopolies?
- Concentration: Vertical integration
- Centralization: Horizontal integration
- Focus: Tangible assets
What distinguishes new monopolies from traditional ones, such as Amazon?
- Concentration: less relevant, outsourcing to reduce risks
- Centralization: data-driven intangible rents
What is the Herfindahl-Hirschman Index (HHI)?
A measure of market concentration calculated by summing the squares of the market shares of all firms in the market.
What HHI value indicates a highly competitive market?
HHI < 0.01
What is one justification for minimum wages in monopsony situations?
To counteract the market power of a single buyer.
Fill in the blank: In a monopoly, the more _______ the demand, the larger the mark-up.
inelastic
What are antitrust laws designed for?
To make monopolized industries more competitive and regulate behavior.
What is disruptive innovation?
A process whereby a new entrant successfully challenges established incumbent businesses.
