Presentation on theme: "The economics of market power"— Presentation transcript:
1 The economics of market power 1. Monopolydefinitionprice, output & profit2. The welfare effects of monopolycomparison with perfect competition3. Competition policy
2 1. Monopoly Competitive world Monopoly high profits - new entrants losses - exits\closureprices determined by the marketsmall firms - no market powerMonopolytheory: single firm = industry (100% of the market)practice: 25% or more of the market
3 1. Monopoly A) The consequences of monopoly price, output & profit Figure 1Profit maximisation: MC=MRLevel of profit: AR - AC (supernormal profit)
5 Barriers to entry B) Sustaining a competitive advantage No, or few, substitutes. Little competitionBarriers to entry(i) Economies of scale (cost advantage)(ii) Government policy e.g. patents(iii) Ownership of know-howtechnological, organisational, etc.
6 Barriers to entry …. supernormal profit in the long run (iv) Ownership of natural resourcesoil, diamonds, etc.(v) Distinctive capability e.g. being innovative(vi) Aggressive tacticse.g. limit pricing…. supernormal profit in the long run
7 2. The welfare effects of monopoly Competitive market versus monopolystatic effectssee figurePm > Pc : consumer surplus, producer surplusQm < Qp : consumers have less choicedeadweight losscosts & ‘X-inefficiency’ e.g.nationalised industries
8 Equilibrium of industry under perfect competition and monopoly: with the same MC curve MCP1AR = DMROQ1Q
9 Dynamic effects profits - investment in R&D (large sunk costs) large size - scale economies - lower costs - lower priceDifferent MC curves
10 Equilibrium of industry under perfect competition and monopoly: with different MC curves MCmonopolyP1AR = DMROQ1Q
11 3. Competition policy Monopoly is not always bad! Government policy rules regarding the conduct of businessassumes: competition maximises consumer welfarebalance: competition versus MESEU policy (McAleese) & UK policy
12 UK Policy Competition Act (1998) Competition Commission investigate mergers & acquisitions‘Chapter I prohibitions’investigate agreements (written or not) which restrict or distort competition (e.g. tacit collusion)‘Chapter II prohibitions’conduct of firms i.e. abuse of market powerAppeals Tribunal - legalDGFT - ‘dawn raids’
13 Conclusion Firms strive for larger profits & market domination mergers & acquisitionsgrowthbarriers to entryMarket failurejustifies government interventioncompetition policy
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