Market structure and powe r

Page 1: Overview

• Market Structure & Power

• Market Problems & Policy Regulation

• Refer to S & W, Ch 14 for additional information

• Focus: Microeconomics: Market Structure & Market Power

• University of Michigan material acquired

Page 2: Topics Covered

• Types of Market Structures:

  • Monopoly

  • Oligopoly

  • Monopolistic Competition

• Setting Prices with Market Power

• Issues & Problems of Market Power

• Public Policy to Restrain Market Power

Page 3: Importance of Market Structure

• Market Structure influences market power.

• Market Power: The ability to charge higher prices without losing sales.

• Types of Market Structure:

  • Perfect Competition

  • Monopoly

  • Oligopoly

  • Monopolistic Competition

Page 4: Perfect Competition

• Characteristics of Perfect Competition:

  • Identical products across businesses

  • Many sellers and buyers, each small relative to the market

• Market Power: Sellers have none.

Page 5: Monopoly

• Characteristics of Monopoly:

  • Single seller in the market

  • Market demand curve equates to the firm's demand curve

• Market Power: Seller has significant power.

Page 6: Oligopoly

• Characteristics of Oligopoly:

  • Few large sellers in the market

  • Sellers are attentive to consumers and each other

• Market Power: Sellers have some power.

Page 7: Monopolistic Competition

• Characteristics:

  • Many small businesses selling differentiated products

  • Efforts to differentiate software from competitors

• Market Power: Sellers possess some power.

Page 8: Market Power Spectrum

• Visual representation of market power:

  • Perfect Competition -> Imperfect Competition (Oligopoly & Monopolistic Competition) -> Monopoly

• Sources of Market Power depend on:

  • Number of competitors

  • Type of product (Identical vs Differentiated)

  • Unique products with monopolies.

Page 9: Market Structure Determines Market Power

• Least power: Perfect Competition

• Most power: Monopoly

• Most firms are in imperfectly competitive markets.

Page 10: Imperfect Competition Insights

• Key Insights:

  • Market power enables independent pricing strategies

  • More competitors reduce market power

  • Effective differentiation increases market power

  • Imperfect competition offers bargaining power to buyers

  • Choices depend on competitor actions.

Page 11: Pricing for Profit Maximization

• Pricing involves a trade-off:

  • Selling high quantities vs making more profit per item

• Firm Demand Curve: Quantity demanded changes with price

• Evaluate using marginal revenue curve.

Page 12: Market Power and Demand

• Market types show how demand and price change:

  • Perfect Competition: No market power

  • Monopolistic Competition/Oligopoly: Some market power

  • Monopoly: Significant market power.

Page 13: Discovering Firm Demand Curve

• Experimenting with prices helps identify firm demand curve

• Strategies may involve varied pricing for different customer groups.

Page 14: Importance of Marginal Revenue Curve

• Focus on Marginal Revenue (MR) for good decision-making

• MR represents the additional revenue from selling one more unit.

Page 15: Sofia's Pricing Experiments

• Example: Price of cars at different quantities to assess demand and revenue

• Experimenting leads to insights on demand and marginal revenue.

Page 16: Marginal Revenue Analysis

• MR reflects:

  • Output Effect: Revenue from selling one additional unit

  • Discount Effect: Revenue loss from reduced price across all sold units

• Formula: MR = P - ∆P × Q.

Page 17: Graphical Representation

• The firm's demand curve slopes downwards

• Marginal revenue lies below the demand curve due to discounts.

Page 18: Sellers' Pricing & Quantity Decisions

• Steps to Determine Pricing:

  1. Continue selling until MR = MC

  2. Set price according to the demand curve.

Page 19: Graphical Decision-Making

• Use graphs to determine optimal price and quantity based on marginal cost and revenue.

Page 20: Profit and Loss Statement

• Profit calculated as total revenue minus total cost, highlighting key figures for quantity, price, and profit conditions.

Page 21: Market Power and Outcomes

• Market power can lead to poor market outcomes, such as high prices for essential goods like drugs

• Situations where sellers can exploit market power are problematic.

Page 22: Monopoly's Profit Maximization Model

• Monopoly Maximizes Profit:

  1. Determine optimal output (Qm) where MR = MC

  2. Use demand curve to set price (Pm)

  3. Calculate profits as (P - ATC) x Q.

Page 23: Key Mechanisms in Monopoly

• Monopoly incentivizes profit maximization through constrained output and unique pricing strategies.

Page 24: Profit Conditions in Monopoly

• Dominant market prices lead monopolies to operate with substantial mark-ups, generating higher profits.

Page 25: Comparative Analysis to Perfect Competition

• Competitive pricing equals marginal costs (P=MC) unlike monopolistic conditions (Pm > MR = MC).

Page 26: Competition vs Monopoly Outcomes

• Comparison highlights inefficiencies and consumer impact due to monopolistic pricing strategies.

Page 27: Welfare Implications

• Consumer surplus: Difference between willingness to pay and market price

• Producer surplus: Difference between market price and costs.

• Competitive outcomes maximize total surplus.

Page 28: Competitive Market Surplus

• Competitive markets efficiently maximize total surplus compared to monopolistic settings.

Page 29: Monopoly's Inefficiencies

• Monopolistic practices create unrealized consumer gains due to reduction in output relative to competitive levels.

Page 30: Consequences of Monopoly Practices

• Inefficient monopolistic pricing strategies lead to significant deadweight loss in markets.

Page 31: Lessons on Market Power

• Four conclusions drawn from market analysis:

  1. Higher prices due to market power

  2. Inefficiently smaller quantities produced

  3. Larger economic profits observed

  4. Market power leads to survival in suboptimal conditions.

Page 32: Benefits of Increased Competition

• Raising competition enhances societal outcomes through lower prices and quantity increases.

Page 33: Public Policy Measures

• Regulatory Approaches: Ensure competition through laws against collusion and mergers that threaten market power.

Page 34: Anti-Collusion Laws

• Legislation aimed to foster competition and prevent anti-competitive practices from hindering market balance.

Page 35: Impacts of Mergers

• Competitive mergers may benefit consumers while anti-competitive mergers harm overall market dynamics.

Page 36: Understanding Merger Effects

• Analyzing share prices and competitive impacts helps assess merger implications.

Page 37: Limitations from Market Power

• Government can implement price ceilings to counter excessive market power, mitigating inefficiencies.

Page 38: Natural Monopoly Insights

• Instances where a single entity best serves market demands, requiring potential government intervention to regulate prices.

Page 39: Market Power Dynamics

• Market structures range broadly affecting levels of market power and pricing strategies utilized by sellers.

Page 40: Marginal Revenue Dynamics

• Understanding marginal revenues allows insights into pricing strategies reflective of market power impacts on seller behavior.