- The
essence of market power
is the ability to alter the price of a product, without losing all
their sales. Sales volume may drop when the price is increased, but
they won't drop to zero. In other words, the firm with market power
is faced with a downward-sloping demand curve.
- A
monopoly is a market structure in which only one firm sells a product
for which there are no close substitutes. Furthermore, there are barriers
to entry (e.g., patents) and economies of scale. Barriers
to entry are obstacles that make it difficult or impossible for
would-be producers to enter a particular market. Economies of scale
are reductions in minimum average costs that come about through increases
in the size (scale) of plant and equipment. Other entry barriers are
monopoly franchises, control of key inputs, licensing requirements.
- The
firm and the industry are the same. The basic rule of profit maximization
is unchanged, that is, produce the rate of output where marginal revenue
equals marginal cost. But, unlike under perfect competition where
marginal revenue is always equal to the price, so long as the demand
curve is downward-sloping, marginal revenue (MR) will be less than
the price.
- Price
Discrimination is the practice of selling units of the good or service
separately, extracting the maximum price individuals are willing to
pay. For example, the airline industry has practiced price discrimination
for many years. Basically, there are two distinct groups of travelers:
business and non-business travelers. The different travel needs of
the two different groups are reflected in their respective demand
curves. Business demand for air travel tends to be less elastic than
the demand for non-business travelers. Fewer business executives would
stop flying if airfares increased. However, higher air fares would
discourage travel by vacationers. So, airlines charge higher
prices for arrangements made on short notice (i.e., business travel)
and lower prices for those who are able to plan ahead.
- A
natural monopoly occurs in an industry where one firm can achieve
economies of scale over the entire range of market output.
- Antitrust
refers to Government intervention to alter market structure to prevent
abuse of market power.
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