Topic 4_Market Power complete

Topic 4_Market Power complete - Topic 4: Global Market...

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Topic 4: Global Market Power and Anti-Trust Issues REQUIRED READINGS: “Forever DeBeers and U.S. Antitrust Law” Online DeBeers Case Discussion: 3/1—3/4 ****Discussion ends on a SUNDAY**** In-class DeBeers Case Debriefing: 3/5
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Firms with Market Power Market power exists when firms are able to restrict competition to sustain prices above marginal cost. Monopoly has 100% market power. Market power can exist with multiple rival firms if products are differentiated and/or markets are segmented (i.e. firms have loyal customers). To gain market power, the manager’s job is to attempt to sustain any factors which limit competition.
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Strategies to Restrict Competition Market Strategies: Guarding trade secretes. Control of an essential resource. Exclusive contracts and customer lock-in. Coke on campus. Extended cell phone contracts. Collusion (form a cartel and act as a monopoly). Non-Market Strategies: Patent or copyright protection. Trade regulations. Government Licensing Government or NGO certification.
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Profit Maximization The profit maximizing sales target occurs where marginal revenue equals marginal cost. If MR>MC then the firm could make a profit by selling one more unit. If MC>MR then the firm would lose money on selling the unit. Given the optimal sales target, price is found as a markup over cost, where the markup factor depends on the demand for the product. More inelastic demand results in a higher mark up over costs.
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Market Power Pricing Graphically CS PS Q $ MC MR D (consumer value) Q f P f P e Q e INE A firm with market power sets price higher and output lower than efficient levels. From the viewpoint of economic efficiency too few units are produced and sold, giving up some that have value greater than costs.
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Perfect Price Discrimination: Each consumer is charged a price equal to her willingness to pay. No inefficiency occurs, but all market surplus goes to the producer (CS = 0). Profits are increased relative to using a single price.
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Topic 4_Market Power complete - Topic 4: Global Market...

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