Chapter 13: Market Power

In the free market

• One price is set by market forces

• Firms and markets are price takers, not setters

• This keeps producers honest, they can’t raise prices or they will lose business—people can just move on to the next brand

Equilibrium price maximizes

• Total surplus

  • Consumer + producer surplus; total well-being in the economy

• But this doesn’t mean it’s maximizing individual surplus

  • If there’s a price floor/ceiling, producers or consumers could be better or worse off

Producers that set the price

• Cause deadweight loss & increases producer surplus at the cost of decreasing surplus

• Should set it slightly above equilibrium price (if they set it at the max price, no customers will buy it)

Monopoly

• When one producer is the only seller of a specific product

• This means they can set the price at whatever they want & have an incentive to charge higher prices

Product differentiation 

• Distinguishing a product as unique from similar products and competitors

• By distinguishing their products enough, producers can create monopolies

Oligopoly

• Multiple producers work together to keep prices high (aka cartel)

• Ex 3 airlines agreeing to keep all their prices high and not undercutting each other (same as a monopoly if they cooperate)

Monopsony

• One consumer has 100% of market share

• Ex production of ballistic missiles (US purchasing missiles from Lockheed Martin, US holds power in determining price because Lockheed Martin doesn’t have any other customers)

Price discrimination

• The act of setting different prices for different consumers

  • Firms will guess your willingness to pay and set a price as close as they can to that level

  • Firms will use any data they can to make these guesses (ex browsing history, past purchases, age, etc.)

• This allows producers to gain more surplus