Market Power, Monopoly, Monopsony, and Price Discrimination

Exam Logistics and Question Types

• Course Coverage: This course covers monopoly and monopsony, but not antitrust (though it will be discussed, it's not on the exam for this section).
• Question Types:
  • Short Answer Questions: Do not require diagrams or maps.
  • Diagram-Only Questions: These are not just pictures but models. Lines in diagrams have specific meanings (e.g., demand curve shows quantity consumed at various prices). Be precise; differentiate between a shift in demand and moving along the demand curve. Use a straight edge for drawing.
  • Arithmetic Question: One arithmetic question will be included. It will be simple, designed without calculators, computers, or any electronics in mind.

Nature of Market Power

• Definition: Market power is the ability of a firm to change its price without losing all demand or gaining the entire market. Essentially, a firm can charge a little more or a little less and still operate in the market.
• Prevalence: Most firms possess some degree of market power; it's rare for a firm to have none.
• Sources of Market Power:
  • Market Elasticity: How sensitive quantity demanded is to price.
  • Number of Competitors: Fewer competitors generally means more market power.
  • Product Differentiation: Companies can distinguish themselves in various ways.
• Examples of Product Differentiation and Market Power:
  • Grocery Stores and Pharmacies: A grocery store with a pharmacy or a pharmacy with a post office captures customers who come for one service and then buy other items (e.g., groceries, drugs) while there. This allows them to charge slightly higher prices for certain commodities because they capture