产业经济学英文版课件：4-Market Power

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1、4-Market Power1Monopoly Pricing2MonopolyProfitsConsumer SurplusDWLConsumer SurplusMonopoly Pricing3Window7LinuxSources of Market Power Government Restrictions on Entry Structural Characteristics Strategic Behavior by Incumbents4Government Restrictions on Entry Natural Monopoly Source of Revenue Redi

2、stribute Rents Intellectual Property Rights5Intellectual Property Rights The two main forms of protection are Patents,which grant innovators exclusive use of new innovations and new products;Copyright,which protects an artists(author,songwriter,computer programmer,etc.)Particular expression of an id

3、ea.6Structural Characteristics Economies of Scale Sunk Expenditures of the Entrant Absolute Cost Advantages Sunk Expenditures by Consumers and Product Differentiation7Economies Of Scale If economies of scale are extensive,then in order to enter on a cost competitive basis,a new entrant requires sign

4、ificant market share.This is likely to depress prices and make it more likely that entry is not profitable.Entering on a small scale will have a relatively small effect on price,but the entrants average costs will then be relatively high,again contributing to negative post entry profits.8Sunk Expend

5、itures of the Entrant Sunk investments mean that any remaining investment is not recoverable upon exit from the market.Many sunk expenditures are fixed costs which also are responsible for economies of scale.9Absolute Cost Advantages The incumbent firm has lower costs of production than potential en

6、trants:at any common scale of operation,the average cost of the entrant exceeds the average cost of the incumbent.Ownership of a superior ore mine or a key patent appears to provide an incumbent with an absolute cost advantage and therefore is a potential entry barrier.10Sunk Expenditures by Consume

7、rs and Product Differentiation Switching costs arise from a number of sources,including Costs of learning how to use A product;Investments in complementary products;Loss of network benefits;Learning about quality;or A less acceptable match between preferences and attributes of the product.11Sunk Exp

8、enditures by Consumers and Product Differentiation Product differentiation means that consumers do not view the offerings of different firms as perfect substitutes.Product differentiation can raise entry barriers when it reduces the size of the market and thereby enhances the effect of economies of

9、scale.Incumbent products that have characteristics that appeal to most consumers will reduce the profitability of entry.12Strategic Behavior by Incumbents Aggressive Post entry Behavior Raising Rivals Costs Reducing Rivals Revenues13Aggressive Post entry Behavior Incumbent firms can act strategicall

10、y to commit to aggressive behavior post entry.This is typically done by reducing economic costs post entry by making sunk investments prior to entry.Reducing the marginal cost of production will typically make threats by the incumbent to act aggressively post entry credible.14Raising Rivals Costs In

11、cumbent firms can act strategically to raise the costs of a potential entrant,thereby putting them at a competitive disadvantage and reducing the profitability of entry.15Exclusive Supply Contracts and Supermarket Data:A.C.Nielsen A.C.Nielsen created the business of tracking supermarket sales in the

12、 1920s.Nielson responded to the threat of entry by IRI by signing up every major Canadian supermarket chain to long-term contracts.These contracts were exclusive:under their terms the supermarkets agreed not to supply their data to any of Nielson s competitors.Moreover,Nielsen staggered the terms of

13、 the contracts so that only a small number of supermarkets would be renewing their contracts each year.16Reducing Rivals Revenues Strategies that reduce the revenue of rivals work by lowering the demand for an entrants product.For instance,this can be done by creating or increasing consumer switchin

14、g costs.17Market Power:A Second Look X-Inefficiency Rent Seeking18X-Inefficiency The concept of X-inefficiency is due to Leibenstein(1966).There existed a positive relationship between external pressures on a firm and effort exerted by employees.A significant social cost of market power is that a fi

15、rms costs would rise because its employees perceived that effort maximization is not necessary.Hicks(1935)The quiet life hypothesis “The best of all monopoly profits is a quiet life.”Microeconomics-Lily19Welfare Implications of the Quiet Life Hypothesis20The red area is the deadweight loss.Society i

16、ncurs a cost equal to the dark gray area due to wasted inputs from the failure of the monopolist to minimize costs.X-Inefficiency Nickell(1996)concludes that there is some systematic statistical evidence that com-petition leads to increases in technical efficiency,total factor productivity,and innov

17、ation.His own results for the manufacturing sector in the United Kingdom indicate that market power is associated with lower levels of,and rates of growth in,productivity.21Rent Seeking The rent-seeking hypothesis is that additional social costs arise from market power due to the efforts of firms to

18、 acquire and maintain monopoly positions(Tullock 1967;Posner 1975).Rent-seeking behavior can consist of lobbying the government,bribing a government official,intervening before regulatory authorities,investing in capacity,advertising and other non-price competition,research and development expenditu

19、res,etc.22Benefits of Monopoly Scale Economies Research and Development23Scale Economies Oliver Williamson(1968)has suggested that if a merger to monopoly results in a decrease in industry-wide costs,these cost savings could easily compensate for any increase in allocative inefficiency.24Cost Advant

20、ages of a Monopolist25The red triangle is the lost consumer surplus associated with monopoly pricing.The white rectangle represents the cost savings associated with the lower costs of the monopolist.Research and Development Schumpeter(1965)argued that Market power is a necessary incentive for resear

21、ch and development.Without the lure of monopoly profits,firms would have insufficient incentives to undertake research and development.It was a mistake to focus on allocative inefficiency if that inefficiency made possible innovation of new products and technologies.For it is this kind of innovation that is responsible for economic growth and substantial qualitative increases in living standards.26