Chapter 8 - Imperfect Competition and the consequences of market power

Chapter 8 - Imperfect Competition and the consequences of market power

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Imperfect Competition and the consequences of market power – Principles of Economics (Ch.8) The concept of a perfect competitive market should be thought of as an extreme, an ideal; the actual market differ from the ideal in vary degrees. Imperfect competition: The imperfect competitive firm hast at least some means to set its own price ( price setter) . Economists distinguish between three different types: Pure Monopolist: the lone seller of a product in a given market Oligopolist: one of a few sellers of a given product Monopolistic Competitor: one of a relatively large number of firms that sell slightly differentiated products Monopolistic: referring to the price setting ability of a firm (any of the three types Essential difference between perfectly and imperfectly competitive firms: Perfectly competitive firm: faces an infinitely elastic (horizontal) demand curve Imperfectly competitive firm: faces an downward-sloping demand curve Market Power: A firm’s ability to raise the price of a good without losing all its sales (downward slopping demand curve). Sources of market power: Exclusive control over inputs: If a single firms controls an input essential to production that firm has market power Patents and Copyright: o Patents: give the investors/developers of a new product the exclusive right to produce and sell the product for a specific period of time Recover development costs Makes innovation attractive E.g. cost of drugs (enormous investments and testing in the first place) o Copyright: protects the author of movies, software, music, books etc. Government licences or franchises: Exclusive contract to one supplier to keep standards Economies of scale (natural monopolies): important! Production becomes cheaper with a higher level of output. o Constant returns to scale: when all inputs are changed by a given proportion output changes same in proportion o Increasing returns on scale: when all inputs are changed by a given proportion output changes by more than that proportion Economies of scale o Natural Monopoly: results from economies of scale (e.g. Airbus and Boeing) Network Economies: important! Products which become much more valuable as more people use them o Format War: during 2005 and 2007 between Blue-ray (Sony) and HD-DVD (Toshiba) o Software Gap: choosing windows over mac as matter of compatibility problems o Users utility depends on other user purchases
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Measuring Market Power:
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