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Unformatted text preview: : Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. if a firm sells a “homogeneous” good, it may be able to command some market power by “branding” or “selling” its
product in such a way that it is perceived to be different from other goods.
For example, Many consumers, including myself, believe Shell gas is ‘different’ from and even better than Sunoco or
Esso (Exxon) gasoline. In reality, almost all major gasoline brands sell the same chemical gasoline and is often purchased
from the same refineries. Gas companies differentiate their product by adding different kind of “additives”, chemicals
that supposedly clean your engine or put a Tiger in your gas tank. As another example, bleach is bleach and theoretically
we should see very little price dispersion. Yet, there is enormous price dispersion and brands like Clorox are sold at much
higher prices. How? The most obvious explanation is that large companies have better access to distribution channels (a
barrier to entry) and also because these companies differentiate on an insanely...
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