chapter 12 markets with market power (1)

chapter 12 markets with market power (1) - Chapter 12...

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1 Chapter 12: Managerial Decisions for Firms with Market Power Market power: Ability of a firm to raise price without losing all its sales Any firm that faces downward sloping demand has market power Gives firm ability to raise price above average cost & earn economic profit (if demand & cost conditions permit)
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2 Measurement of Market Power Degree of market power inversely related to price elasticity of demand The less elastic the firm’s demand, the greater its degree of market power The fewer close substitutes for a firm’s product, the smaller the elasticity of demand (in absolute value) & the greater the firm’s market power When demand is perfectly elastic (demand is horizontal), the firm has no market power
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3 Measurement of Market Power If consumers view two goods as substitutes, cross-price elasticity of demand (E XY ) is positive The higher the positive cross-price elasticity, the greater the substitutability between two goods, & the smaller the degree of market power for the two firms
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4 Monopoly Single firm: price-maker or price setter Produces & sells a particular good or service for which there are no good substitutes New firms are prevented from entering market A firm can possess a high degree of market power only when strong barriers to entry exist Marginal cost is always greater than Price
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5 Common Entry Barriers Conditions that make it difficult for new firms to enter a market in which economic profits are being earned Economies of scale When long-run average cost declines over a wide range of output relative to demand for the product, there may not be room for another large producer to enter market Barriers created by government Licenses, exclusive franchises
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6 Common Entry Barriers Input barriers One firm controls a crucial input in the production process Brand loyalties Strong customer allegiance to existing firms may keep new firms from finding enough buyers to make entry worthwhile
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7 Common Entry Barriers Consumer lock-in Potential entrants can be deterred if they believe high switching costs will keep them from inducing many consumers to change brands Network externalities Occur when value of a product increases as more consumers buy & use it Make it difficult for new firms to enter markets where firms have established a large network of buyers
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8 Monopoly Behavior Goal Earn highest profit possible Economic constraints Cost – to produce any level of output Input prices Technology Given market demand curve the highest price it can charge The output level And the maximum price it can charge and still sell that output level The price And the maximum output the firm can sell at that price
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chapter 12 markets with market power (1) - Chapter 12...

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