slides_16_H.pdf - On a previous episode of Microeconomics...

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MARKET POWER AND PUBLIC POLICY 1 On a previous episode of Mi croe co nomics Monopoly power implies p > MC This leads to a loss in efficiency: deadweight loss Today: it gets worse! — additional negative effects of market power. What can public policy do about it? 2 Outline Effects of market power Competition policy Regulation 3 Outline Effects of market power Competition policy Regulation 4
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Spot the differences q C p C D S A B q p q M p M D MC A B D C q p 5 Solution: deadweight loss, distribution, rent seeking; X-inefficiency. Effects of market power Loss in allocative efficiency ( C ) (a.k.a. deadweight loss) Loss in productive efficiency ( D ) (a.k.a. X-inefficiency) Transfer away from consumers (shrinking A ) Not shown in graph: + innovation incentives (“creative destruction”) - rent seeking 6 Outline Effects of market power Competition policy Regulation 7 Price fixing Explicit collusion is illegal
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