Price-Setting, Competition, and Market Power

7.10 of The Economy 1.0 & The Economy #4 & #5

What does a monopoly mean?

-Where only one firm exists that is the only seller of a product with no close substitutes.

What did Augustin Cournot (1801-1877) talk about regarding oligopoly?

-Oligopoly is where a market hosts only a small number of firms

-Essentially, the Oligopoly could either compete and result in a somewhat competitive market or collude and lead to market manipulation. This is a cartel.

How can the level of substitutes in the market affect the PED?

-If consumers can choose between similar enough goods, the demand for these goods will be elastic.

-Because if the price of one good rises, and close substitutes exist, then they may be willing to substitute for a substitute

-Thus, these firms will also have a low profit margin.

What does monopoly rents infer?

-Form of economic profit that arises due to restricted competition in selling a firm’s product

What does market power infer?

-Attribute of the firm that can sell its products at a range of feasible prices, thus acting as a price-setter.

Generally speaking, why do policymakers like competition to occur in markets?

-Competition ensures no one firm has too much market power, because if so, the prices will be set at such a point where economic profits are huge, consumers are harmed, and potential consumer surplus is missed.

What does competition policy aim to do?

-In a nutshell, limit monopoly power and prevent cartels.

How can a dominant firm exploit its power, other than setting high prices?

-Bundling together multiple goods and services secretly.

-Making products worse so they would get replaced more quickly

-Decimate local competition to ensure it is the only firm