ECON 251 Module 10: Market Power

Corrective taxes and subsidies

corrective tax equal to the external cost (negative externality), corrective subsidy equal to the external benefit (positive externality)

Private goods

rival and excludable, market handles best, examples being salad and a congested toll road

Club goods

nonrival and excludable, also natural monopoly, examples being Netflix and not congested toll road

Common goods

rival and nonexcludable, examples fish in the ocean and congested road with no toll

Public goods

nonrival and nonexcludable goods, examples firework show and not congested road with no toll

Rival

one agent’s use interferes with another agent’s use

Excludable

somebody has to pay

Free rider problem

when benefits are nonexcludable, someone can enjoy benefits without bearing cost; creates either public goods problem and tragedy of the commons

Public goods problem

when benefits are nonrival and nonexcludable, benefits earned by others don’t hurt you

Tragedy of the commons

when benefits are rival and nonexcludable, benefits earned by others hurt you

Solution to public goods externality

government provides public goods

Solutions to externalities

private bargaining, corrective taxes/subsidies, cap and trade, laws and rules and regulation and norms, provide public goods directly, assign ownership rights to solve tragedy of the commons

Perfect competition

price taker, market demand vs firm demand, many buyers, many sellers, no differentiation, no control over price, no barriers to entry (long run, firms will make no profits), perfectly elastic of demand

Monopoly

price maker, market demand is the firm’s demand curve, many buyers, one seller, high differentiation, most control over price, barriers to entry (long run, firm will make profit), least elastic demand

Oligopoly

many buyers, few sellers, no or high differentiation, some control over price (interdependent pricing), barriers to entry (long run, firms will make profit)

Monopolistic competition

many buyers, many sellers, differentiation, control over price, no barriers to entry (long run, firm will make no profit), different product attributes yield market power, elastic demand

Market power

the ability to change prices without losing many sales to competing sellers, depends on extent and type of competition your business faces, determines best pricing strategy

Firm’s market power depends on

how few competitors you face, how successfully you differentiate your products from competitors

CR4 and CR8

add up market shares for top 4/8 companies

HHI

the sum of the squares of the market shares

HHI implications

monopoly HHI=10,000, perfect competition HHI close to 0, as number of firms increase the HHI gets closer to 0, and higher HHI means more market concentration

Department of Justice HHI

considers HHI between 1,500-2,500 moderately concentrated, HHI greater than 2,500 is highly concentrated, transactions that increase HHI more than 200 points are presumed to enhance market power