ECON: Chapter 14: Market Structure and Market Power

market power:

the extent in which a seller can charge higher prices without losing many sales to competing businesses

how much market power is in a perfectly competitive market?

none

4 characteristics of perfect competition

1. many buyers
- each is small relative to the market
2. many sellers
- each is small relative to the market
3. identical goods
4. buyers and sellers are price takers

monopoly:

the only seller in the market, it has no direct competition

oligopoly:

a market with only a large handful of sellers. managers of oligopolistic businesses are locked in a strategic battle for market share

monopolistic competition:

a market where many competing businesses sell somewhat differentiated products

what two market structures are rare

perfect competition and monopolies

most businesses operate in which market structure

imperfectly competitive markets

imperfect competition:

the situation of facing at least some competitors and/or selling products that differ at least a little from those of competitors

5 insights of imperfect competition

1. market power allows you to pursue independent pricing strategies
2. having more competitors leads to less market power
3. successful product differentiation gives you more market power
4. imperfect competition among buyers gives them bargaining power
5. your best choice depends on the actions that other businesses make

on a graph, which 2 curves do you use to evaluate the trade-off between quantity and price

firm demand curve and marginal revenue curve

firm demand curve:

summarizes the quantity that buyers demand from an individual firm as it changes its price

difference between market, firm, and individual demand

- market demand is the quantity demanded across all firms
- firm demand is the quantity demanded from your firm
- individual firm is the quantity demanded by a single buyer

marginal revenue:

the addition to total revenue you get from selling one more unit

why we use the marginal principle

to break big decisions into smaller decisions

your marginal revenue =

output effect (the price of the extra item you sell)
minus
discount effect (the price cut you'll have to offer times the quantity that gets this price cut

steps to setting prices and quantities with market power

1. what quantity should you produce?
2. what price should you charge?

4 lessons in comparing market power and perfect competition

1. the market power price exceeds the competitive price
2. the market power quantity is less than the competitive quantity
3. a firm with market power earns a healthy profit margin (equal to the market price - average cost)
4. these profits mean that a business with market power can survive, even if it's inefficient

why we have the underproduction problem

market power leads businesses to produce a lower quantity and sell at a higher price
- patents provide incentive to engage in research

governments regulate markets through what 2 laws

1. laws that ensure competition thrives
2. laws that limit the harmful ways that businesses might exploit their market power

collusion:

an agreement to limit competition

competitive merger vs. anti competitive merger

- competitive merger creates a more fear competitor (bad for rivals, good for consumers)
- anti competitive merger reduces competition for all sellers (good for rivals, bad for consumers)

price ceiling in perfectly and imperfectly competitive markets

- perfect: price ceilings reduce economic surplus
- imperfect: price ceilings increases economic surplus

natural monopoly:

a market in which it is cheapest for a single business to service a market
- ex: water, electricity