Chapter Objective: Learn how to set prices when you have market power.
14.1 Beyond Perfect Competition: Monopoly, Oligopoly, and Monopolistic Competition
Evaluate how market structure shapes market power.
14.2 Setting Prices with Market Power
Calculate optimal pricing with market power.
14.3 The Problem with Market Power
Analyze how market power distorts market forces.
14.4 Public Policy to Restrain Market Power
Assess policies to mitigate market power issues.
Founded by Steve Wozniak and Steve Jobs in a garage, Apple became the first company to exceed $1 trillion in valuation.
Key Factors of Apple's Success:
Obsessive Perfectionism of Steve Jobs.
Understanding of Economics: Strategic focus on dominating markets rather than competing directly.
Example: The iPhone launched the smartphone market, leading to reduced competition and higher profit margins.
Conclusion: Much of Apple's success derived from its market power in specific product categories.
The chapter focuses on how market structure influences pricing strategies.
Key Questions for Business Strategy:
Number of competitors: many vs few.
Anticipating new entrants into the industry.
Degree of product differentiation.
Market Structure Importance:
Determines market power: Ability to raise prices without losing many sales.
Example: A lone gas station in a town has higher market power versus one of four at an intersection.
Definition: Many competitors selling identical goods.
Characteristics:
Price takers: Sellers cannot influence the market price; raising prices means losing all customers.
Examples include agricultural markets, commodities markets, and stock markets.
Outcome: Businesses in perfect competition have zero market power and must follow market prices.
Monopoly:
A single seller dominates the market (e.g., YKK zippers);
Market Power: Significant, as no direct competition exists.
Oligopoly:
Few large firms dominate (e.g., Verizon, AT&T, T-Mobile);
Strategic Interdependence: Firms must consider rivals' actions in their decision-making.
Monopolistic Competition:
Many firms sell similar but differentiated products (e.g., jeans);
Product Differentiation: Allows businesses to gain market power and increase prices.
Spectrum of Market Power: From perfect competition to monopoly, illustrating varying degrees of market power.
Imperfect Competition: Most markets lie in between perfect competition and monopoly; businesses face some competition but have market power.
Insight 1: More competitors reduce market power;
Insight 2: Market power enables independent pricing strategies;
Insight 3: Successful product differentiation increases market power;
Insight 4: Buyer negotiations can give them pricing leverage;
Insight 5: Business decisions are interdependent in strategic contexts.
Learning Objective: Calculate the best price in relation to market power.
Price-Setting Decisions:
Balancing volume versus profit margin is crucial.
Firm Demand Curve: Shows how quantity demanded changes with price.
Marginal Revenue Curve: Measures additional revenue from selling one more unit, highlighting the trade-off between quantity sold and price.
Marginal Revenue Formula: Difference between output effect and discount effect.
Example of Sofia’s Car Sales: Selling price changes and their effect on quantity sold.
Key Principle: Sell an additional unit if marginal revenue equals marginal cost.
Use the demand curve to find optimal pricing based on quantity produced.
Economic Crisis Example: High AIDS drug pricing highlights market power issues; solutions involve improving affordability through reduced pricing powers.
Market Outcomes Examination: Market power leads to high prices and inefficiently low quantities produced.
Government Interventions Include:
Anti-collusion laws.
Merger regulations.
Encouraging international trade to increase competition.
Price ceilings to protect consumers from monopolist pricing.
Market power leads to inefficiencies and pricing issues; understanding market structure is vital for effective business strategy.
Realizing the complexity of market mechanisms guides strategies for market stability and consumer benefit.