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chapter 12 market structure with market power(1)

chapter 12 market structure with market power(1) - Chapters...

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Chapters 12: Managerial Decisions for Firms with Market Power Market Power is ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ___ Any firm that faces downward sloping demand has _________________________________________________ It gives the firm the ability to raise price above average cost & earn economic profit (if demand & cost conditions permit) Monopoly is a market that consists of a ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________
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____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ Example: in most cities government-owned or regulated public utilities –gas and electric companies, the water company, the cable company, and the telephone company-are all monopolies or virtually so. There are no close substitutes for services provided by these public utilities. Measurement of Market Power Degree of market power is _____________________ related to price elasticity of demand The less elastic the firm’s demand, the ____________________ its degree of market power The fewer close substitutes for a firm’s product, the _____________________ the elasticity of demand (in absolute value) & the ________________________ the firm’s market power When demand is __________________________________ (demand is horizontal), the firm has no market power
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Sources of market power : 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 Modern technology in some industries is such that efficient, low-cost production can be achieved only if producers are extremely large both absolutely and in relation to the market. Where economics of scale are very significant, a firm’s long’s long-run average-cost will decline over a wide range of output. 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 Legal Barriers to entry: Patents and Licenses Government frequently allows and regulates natural monopolies. Government also creates legal entry barriers by awarding patents and licenses and exclusive franchises Input Barriers One firm controls a crucial input in the production process. Private property can be used by a monopolist as an obstacle to potential rivals. A firm owning or controlling a resource essential to the production process can prohibit the creation of rival firms.
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