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1、Chapter 8 Market Structure: Monopoly and Monopolistic Competition,Market Power,Market power: ability of a firm to influence the prices of its products and develop strategies to earn profits over longer periods of time Monopoly: single firm producing product with no close substitutes Price-searchers:
2、 firms in imperfect competition,Monopoly Model with Positive Economic Profit,Figure 8.1a,A,B,Monopoly Model with Positive Economic Profit,Figure 8.1b,A,B,Monopoly Model,Monopolist maximizes profits by producing where MR = MC and earns positive economic profit due to barriers to entry The monopolist
3、could suffer losses if ATC is greater than price at the profit-maximizing level of output (see next slide) The model has no supply curve,Comparing Monopoly and Perfect Competition,Figure 8.2,Comparing Monopoly and Perfect Competition,Monopolistic firm must seek out optimal price, which depends on de
4、mand and cost conditions Firms with market power might pursue other profit goals Price is higher and output lower under monopoly than under perfect competition,Barriers to Entry,Economies of scale and mergers Barriers created by government Input barriers Brand loyalties Consumer lock-in and switchin
5、g costs Network externalities,Economies of Scale and Mergers,Exist when a firms LRAC slopes downward or when lower production costs are associated with larger scale of operation Can act as a barrier to entry in different industries Mergers are particularly important in technology, media, and telecom
6、munications,Barriers Created by Government,Licenses Patents and copyrights Public good Cost of exclusion Nonrival consumption,Input Barriers,Control over raw materials Barriers in financial capital markets Larger firms can get lower interest rates Smaller firms need more collateral for loans Smaller
7、 firms are perceived as riskier,Consumer Lock-In and Switching Costs,When consumers become locked into certain types or brands and would incur substantial switching costs if they changed Although lock-in types are dominant, they represent managerial strategies that can be used elsewhere to gain mark
8、et power,Consumer Lock-In Costs,Contractual commitments Durable purchases Brand-specific training Information and databases Specialized suppliers Search costs Loyalty programs,Consumer Switching Costs,Compensatory or liquidated damages Replacement of equipment Learning a new system Converting data t
9、o a new format Funding of new supplier Combined buyer and seller search costs Lost benefits from current supplier,Managers can Use lock-in as a competitive strategy Be prepared to offer customers concessions and attractive terms Sell to influential buyers and attract buyers with high switching costs
10、 Increase customer commitment and entrenchment,Managerial Rule of Thumb: Using Lock-in as Strategy,Network Externalities,Act as a barrier to entry because the value of a product depends on number of customers using the product Can be considered demand-side economies of scale, in contrast to supply-s
11、ide economies,Changes in Market or Monopoly Power,SBC update Department stores versus discounters Trend toward premium goods New gasoline competitors,Measures of Market Power,Managers can use measures to better understand the markets Lerner Index: measure of market power that focuses on the differen
12、ce between a firms product price and marginal cost of production,Cross Elasticity of Demand,Percentage change in the quantity demanded of good X relative to the percentage change in the price of good Y The higher the cross elasticity, the greater the potential substitution between goods,Concentratio
13、n Ratios,Measure market power by focusing on share of the market held by the largest firms Assume that the larger the share of the market held by few firms, the more market power those firms have Describe only one point on the size distribution Market definitions may be arbitrary,Herfindahl-Hirschma
14、n Index,Uses information about relative market shares of firms in the industry Is the sum of the squares of the market share of each firm in the industry The U.S. Justice Dept. uses it to evaluate competitive efforts of mergers Used to calculate number of “effective competitors”,Antitrust Issues,Fed
15、eral legislation that limits market power of firms and regulates how firms use their market power to compete Major components of antitrust law: Sherman Act of 1890 Clayton Act of 1914 Federal Trade Commission Act of 1914,Focus of the Clayton Act,Price discrimination that lessens competition The use
16、of tie-in sales and exclusive dealings Mergers between firms that reduce competition The creation of interlocking directorates,Focus of the Horizontal Merger Guidelines,Definition of the relevant market Level of seller competition in that market Possibility that a merging firm might affect price and output Nature and extent of entry into the market Other factors influencing coordination among sellers Extent to which any cost savings and efficiencies could offset increase in market power
