L14 - product differentiation and cost structure as a source of market power

How do firms attempt to achieve a monopoly

Lobby regulators to remove competition and attempt to eliminate competition

How does society create monopolies?

Patents

Why would society grant patents?

Creates an incentive to create intellectual property

How do patents limit market power

Patent term limits

examples of product differentiation

Retail location, style, ancillary services

Why would average costs fall with scale

Economies of scale in production

Lower input costs increased with size

Large fixed costs

How do cost attracted act as a source of market power

Average costs falling with scale

Limit competition

Small number of large firms leaves no scope for smaller entrants

Natural monopoly

Less costly for one firm to supply the market

Eg heavy industries eg power generation and distribution, rail networks

Typical policy responses are public ownership or regulation

How do governments enhance societal welfare by limiting market power and promoting competition

Competition policy

Competition law and competition authorities to enforce them

How do competition suthorities control anticompetitive behaviour

Price fixing cartels

Hoarding strategic assets

Enforcing open sharing of consumer information

Controlling merger and acquisitions and splitting large firms