Market Power and Market Structures

chaptermarket power → The extent to which a seller can charge a higher price without losing many sales to competing businesses.

market power

The extent to which a seller can charge a higher price without losing many sales to competing businesses.

examples of market power

• Airlines

• Remote gas station

• Airport Starbucks

• Beer/food at sporting events

four categories of market structure

1. Perfect competition

2. Monopolistic competition

3. Oligopoly

4. Monopoly

market power of perfect competition

no market power

characteristics of perfect comeptition

• relatively rare

• many buyers, many sellers

• businesses sell the same things

Product Differentiation

Efforts by sellers to make their products differ from those of their competitors.

examples of product differentitation

brand image, quality, store location, customer service, return policy, shipping & packaging.

examples of perfect competition

• Agricultural markets, selling crops

• Commodities markets

• Stock market

Monopolistic Competition

• A market with many businesses competing, each selling differentiated products

• very common

• must implement product differentiation to stand out

result of differentitation

The more distinct you make your product, the more market power you have.

examples of monopolistic competition

peanut butter brands, clothing, shampoo, restaurants.

Characteristics of an oligopoly

• A market with only a handful of large sellers

• Products can be somewhat different or somewhat similar.

Characteristics of a monopoly

• no direct competitors

• high market power

high market power enables

sellers to increase prices without loosing customers to competition

Strategic interaction

firms consider rivals' reactions when setting price/quantity

examples of an oligopoly

cellphone plan distrubuters; airlines; grocery chains

two market structures considered to be imperfect competition

monopolistic competition and oligopoly

Five Key Insights into Imperfect Competition

1. More competitors leads to less market power

2. Market power allows you to pursue independent pricing strategies.

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.

why is the interdependence principal important in imperfect competitive markets

the best strategic choices likely depends on the choices that others make

if price is too low, your profit margin ___.

disappears

firms demand curve illustrates

how the quantity that buyers demand from an individual firm or business varies as it changes the price it charges.

firm’s demand curve focuses on

the quantity demanded from your specific firm, or business

the market demand curve describes

the quantity demanded across all firms in the entire market

individual demand curve describes

the quantity demanded by an individual buyer.

what determines the shape of your firm’s demand curve?

market power

how do firms learn their demand curves?

by charging different prices:

• to different groups of people

• to different locations

• at different times

why is a firms demand curve = the market demand curve in a monopoly?

they hold all market power meaning they have full control over the entire market

what does a firm’s demand curve summarize?

the market power of your firm

market demand curve describes

the quantity demanded across all firms in the entire market

Marginal Revenue

Change in total revenue from selling one more unit

Marginal Cost

Cost of producing one more unit

How do firm’s determine what quantity to sell

when MR = MC

MR =

change in total revenue

total revenue =

P x Q

Marginal revenue trade-off

If you lower your price, you sell more units, but you won’t make as much money from each unit you sell.

the output effect

You gain revenue from selling a larger quantity of items

the discount effect

You lose revenue when you cut the price a bit

the discount effect in perfect competition

zero

what is the trade off

selling a larger quantity of items versus making more money on each item you sell

key price setting take aways

• when you have market power, you have price setting capabilities

when does inefficient quantity occur

when a firm’s marginal cost is below the demand curve (i.e., marginal benefit) at this quantity.