Write a one to two page paper, addressing the following:
a. Describe in your own words the concept of market power.
b. Provide an example of a firm exercising its market power.Referring to your example above, answer the following questions:
- What are the sources of the firm’s market power?
- Can they be sustained over a short run / long run?
c. Answer the question below in your conclusion:
- Why is it hard for a firm to maintain market power over a Long Run?
- Respond to the postings of two of your classmates. please write under this discussions
- Market power is a measure of the ability of a company to successfully influence the pricing of its products or services in the overall marketplace.Market PowerFactors influencing Market Power1. Number of companies in a marketFor a company to hold extensive market power in the industry in which it operates, the industry must not be heavily populated. Market power is inversely related to the number of companies present in the market. Fewer companies mean greater market power is available to each player.2. Elasticity of demandFor a company to exert market power, it must be faced with an inelastic demand from its customers. This means that regardless of the price of the product, there is a persistent need for the product. Companies can achieve an inelastic demand curve by providing unique products and services that create value for the customer.3. Product differentiationIf a company can provide differentiated products and services that are able to fill a hole in the market, it will gain market power. In industries where comparable substitute products are readily available, companies donâ€™t usually hold much market power.4. Ability of companies to make above â€œnormal profitâ€In a perfectly competitive market, where buyers and sellers are both price takers, it is not possible to make above-normal profits in the long run. If there is a scenario where companies can make profits above the normal profit range, more companies will join the industry seeking the same, and this will dilute the position of each player and bring down the profits to normal. A company with great market power will be able to make profits above â€œnormal profit.â€5. Pricing powerIf a company offers distinguished products and services or holds extensive market share, it can, to some extent, dictate the pricing of its products and meet the inelastic demand from customers. A high degree of pricing power helps a company achieve market power.6. Perfect informationIf an industry enjoys a perfect flow of information and there is no mismatch between facts and information available to sellers, players will not achieve market power.7. Barriers to entry or exitIf an industry has high barriers to entry, the players typically hold market power. High barriers to entry mean the existing players are protected, because few new players can enter to disrupt the marketplace.8. Factor mobilityIf an industry provides equal ease of access to inputs of its products or services, the market power of individual firms will not be better off.
Market Power :The ability of a firm to influence or control the terms and condition on which goods are bought and sold. A profit-maximizing firm with market power is most likely to use that market power to charge higher prices than if an industry was more competitive.For Examples :A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases,
monopsony, the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly
concentrated markets may be
contestable if there are no
barriers to entry or
exit, limiting the incumbent firm’s ability to raise its price above competitive levels. Market power causes markets to be inefficient and thus fail. For example, monopoly prices are higher than competitive prices, and thus negatively affects consumer.The monopolist gains but by less than what consumer loss. Therefore monopoly reduces total surplus-The short-run trade-off between inflation and unemployment. The natural rate of unemployment depends on various features of the labor market. Examples include minimum-wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search. The inflation rate depends primarily on growth in the quantity of money, controlled by the fed.- When the iPhone was initially introduced by Apple, the company had substantial market power as it essentially defined the smartphone and app market with the launch of the product. it was for a short period of time the monopoly.- As ‘ Prime day ‘ hits, Amazon is charging sellers more to run ‘ lightning deals’. This is an example of market powers. And it’s the downside of network effects in proprietary that drive towards natural monopolies.- A telecom company with a monopoly in a particular region can raise prices extremely high in the absence of price regulations.A medicine protected by pharmaceutical patents may have near total market power.The sources of Market Power :
- Economic of scale â€“ economic of scope â€“ government regulation â€“ intellectual property patent â€“ product differentiation â€“ intellectual property copyright.
It is hard for a firm to maintain market power over a long run because eventually another company is going to find a way, through mergers, acquisition or introduction of some new technology to offer that product or service at a better rate than the firm with market power
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