Market Power | My Assignment Tutor

28/11/20201Diploma of BusinessWUCB162/DSSC108 – Economics and SocietyWeek 7Market Power1Emailing your Lecturers/Tutors• In the subject line always include:• Your full name (and English name)• Student number• Subject code2Assessment scheduleTask Date Due Weighting• Class Test 1 Wk 6 20%• Class Test 2 Wk 11 20%• Tutorial Preparation Weeks 1-10 10%• Final Assessment Wk 12 50%(Note: The tutorial preparation mark will be based on theparticipation and completion of tutorial exercises)31 2 328/11/20202Remember…• The lecture slides provide a summary• You need to• take your own notes in lectures• attempt tutorialquestions• participate in tutorials• take your own notes in tutorials4Competition• Competition• Many small buyers and sellers• A standardized product• No barriers to entry or exit• Price taker• A firm that is unable to influence the marketprice of its product© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 5© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 6Example: A competitive market for fresh fishThe competitive market determines the price per unit of fish. Equilibrium price is $120 perunit (hundredweight), and equilibrium quantity is 7,000 units.4 5 628/11/20203Competition• Competitive market price• Market demand curve• Reflects the value of a good to all the buyers inthe market• Market supply curve• Reflects the costs of production incurred byproducers in the market• Resulting in a reasonable outcome (asopposed to “unreasonable prices”)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 7Monopoly• Monopoly• Market with only one firm• Product with no close substitutes• Strong barriers to entry• Monopolist• The single firm in a monopoly market© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 8Monopoly Market Power• Market power• Ability of an individual firm to influence themarket price of its product• Price maker• A firm that is able to influence the marketprice of its product• Barriers to entry• Market characteristic that prevents new firmsfrom entering the market© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 97 8 928/11/20204Monopoly Outcomes• Monopoly (as compared with a competitivemarket)• Produce less• Employ fewer workers• Charge a higher price• Relatively inelastic demand (relatively higherchange in quantity to change in price) equatesto higher revenue• Higher revenue with lower costs (i.e. fromlower quantity) equates to higher profits© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 10© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 11Example: Cable TV demandBecause the cable TV company’s demand curve is downward sloping, the companysimultaneously establishes a price when it supplies a certain quantity. By reducing its output to20,000 units, it can increase its revenue.Oligopoly• Oligopoly• Market in which only a few large firmsdominate• Market power – can influence market price• Oligopolists• Individual firms in an oligopoly market© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 1210111228/11/20205Concentration• Concentration ratio• Percentage of output produced by the fourlargest firms in an industry• The higher the concentration ratio• The greater is the concentration in the industry• > 80—very high concentration• Firms have very significant market power• 50 to 80—significant concentration• < 40—less concentration© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 13Measuring Concentration• Concentration ratio—some cautions• Based only on domestic production andexclude foreign competition (imports)• Calculated for the entire nation, yet manymarkets are regional• E.g., ice cream, newspapers• Barriers to entry• Principal reason that some markets aredominated by a few large firms© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 14© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 15Concentration ratios for selected manufacturingindustries, four largest companies, 2013ain USA13141528/11/20206Barriers to Entry1. Economies of scale• A large amount of a product can be producedat a lower cost per unit than a small amountof the product• Factors• Technology used in manufacturing• Organization of labor• Discounts for buying in bulk© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 16Barriers to Entry2. Exclusive franchise• Permission by the government for a monopolyfirm to exist• Typically government regulated (to at leasthelp protect the consumer)• E.g. Sydney Water• Usually where a natural monopoly exists – i.e.where significant economies of scale exist© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 17Barriers to Entry3. Control of essential raw materials• New firms will not be able to obtain the rawmaterials to begin operations4. Patents• Government grant of exclusive rights to use orsell a new technology or product for a periodof time• Patent holder is sole producer for years• Effectively a “limited term monopoly grant”• Aggressive litigation discourages competitors© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 1816171828/11/20207Barriers to Entry5. Product differentiation• Creation of the image that one firm’s product isdifferent from or somehow superior to othersimilar products6. License• A permit to operate in a trade or profession• Ensures competency and restricts entry into field7. Behavior of established firms• Predatory competition – strategically lower pricesby established suppliers to ward off competition© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 19Implications of Market Power• With market power, revenue can be increasedby reducing output below the competitivelevel, resulting in a higher price, lower output,less employment, and higher profits.• In addition, market power consequences:• If oligopolists cooperate and behave like amonopoly (“collusion”)• Results in inefficiency• Can also result in price discrimination© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 20© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 21Output, price, and profits under competition andmonopolyNote that output is lower and that price and profits are higher under a monopoly than theywould be under competition.19202128/11/20208Implications of Market Power• Collusion• Oligopolists cooperating and “price-fixing” byreducing output• Two types of collusion:• Cartel• A group of producers that explicitly engages inprice-fixing• Price leadership• Firms follow the price increases of a leadingfirm (not explicit)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 22Implications of Market Power• Inefficiency• With market power and a lack of competition,firms have less incentive to be efficient.• Results in:• Lower supply• Higher price• Lower equilibrium quantity which requiresless employment© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 23Implications of Market Power• Price discrimination• Charging different groups of buyers differentprices• Price differentials are not justified by costdifferences• Autos: high markup on replacement parts• Pharmaceuticals: more expensive in privatehospitals than in retail stores© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 2422232428/11/20209Forces That Decrease Market Power1. Technological change• Economies of scale—eroded by technologicalchange – e.g. cars compete with trains in 1900s2. Regulatory (antitrust) bodies• Australian Competition & Consumer Commission(ACCC) polices antitrust activity• An independent Commonwealth statutory authoritywhose role is to enforce the Competition and ConsumerAct 2010 and a range of additional legislation,promoting competition, fair trading and regulatingnational infrastructure for the benefit of all Australians.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 25Forces That Decrease Market Power3. Regulation and deregulation• Deregulation – reducing regulatory restrictionsto promote competition• Regulation – usually prices are set bygovernment regulators to ‘oversee’ industrieswhere natural monopolies exist• Regulation can protect consumers wherenatural monopolies exist, but are inferior tocompetition when competition is possible© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 26Forces That Decrease Market Power4. Import competition• Imported goods and services promotescompetition with local suppliers• Reduces the market power of domestic firms• However, the effectiveness is reduced ifimport quotas and tariffs exist• Limit competition from foreign imports• Protects the local market power that exists© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 2725262728/11/202010The Extent of Market PowerHow serious is the problem of marketpower?• Evidence of action to lower marketconcentration• International trade• Information revolution• Trend of public resources devoted to antitruste.g. ACCC in Australia (established in 1995)© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 28Local Aspects of Market Power• ACCC focus on large companies market power• section 46 of the Competition and ConsumerAct prohibits the misuse of market power –focuses on big business acting alone.• substantial market power and whether conducthas the purpose or likely effect of substantiallylessening of competition (reviewed whenmergers are proposed)• Prohibit good (“pro-competitive”) conduct?– Low prices that are too low could drive localfirms out of business© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 29Local Aspects of Market Power• Large companies• Supporting arguments• Large employer• Efficiency of operations• Low prices – benefit consumers• Too Big to Fail?• Unemployment impacts• Government bailouts during GFC© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3028293028/11/202011Market Power and Elasticity• Elasticity and monopoly profits• Inelastic demand• Unique product with no close substitutes• Small reduction in the quantity• Much higher price• Higher profit• Higher revenue• Smaller quantity of output• Lower costs of production© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 31© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 32Output, price, and profits under competition andmonopolyNote that output is lower and that price and profits are higher under a monopoly than theywould be under competition.Market Power and Elasticity• Elasticity and pri ce discrimination• One group: elastic demand• Lower price• Higher increase in quantity• Higher revenue• The other group: inelastic demand• Higher price• Lower decrease in quantity• Higher revenue© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3331323328/11/202012Tutorials• It is essential to complete the requiredproblems and reading before your tutorial sothat you can participate fully in the discussion.• Please type and upload your tutorial workthrough the relevant Turnitin submission boxon Moodle.• Please note the submission box on Moodlecloses at 12:25pm on Wednesday for allstudents.© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3434

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