Lecture 2: Market structure, market power, and welfare
Outline
Typology of market structures
Indicators of declining competition
Indicators of declining competition
Indicators of declining competition
Causes of declining competition
Profit maximization (Church ch2)
Perfect competition
Perfect competition (another way to look at it, LWG)
Perfect competition: Pre-entry
Perfect competition: Post-entry
Monopoly
Monopoly
Monopoly
Welfare
Welfare
Allocative efficiency
Allocative efficiency: An example
Allocative efficiency: An example
Allocative efficiency: Quantifying the DWL
Allocative efficiency: Quantifying the DWL
Productive efficiency
Productive efficiency
Productive efficiency: Natural monopoly
Welfare: TS or CS?
Welfare and competition policy
Welfare and competition policy
Welfare and competition policy
The Lerner index
The Lerner index
Competition and welfare: More than just prices…
Rent seeking
Rent seeking
Market power and entry threats
Market power and entry threats
Internet monopolies (The Economist, 2016)
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Internet monopolies
Summary

Market structure, market power, and welfare ( lecture 2 )

1. Lecture 2: Market structure, market power, and welfare

2. Outline

• Perfect competition and monopoly.
• Welfare
– Allocative efficiency
• Surplus standard
– Productive efficiency
The Lerner index
Welfare: more than just quantity
Market power and entry threats
Application: Internet monopolies

3. Typology of market structures

3

4. Indicators of declining competition

• Increased concentration in many industries…

5. Indicators of declining competition

• Return on invested capital has become increasingly
concentrated (increased rents)…

6. Indicators of declining competition

• Decline in the number of new firms (due to entry barriers)…

7. Causes of declining competition

• Mergers: in 2015,
– Global M&A volume hit $5 trillion, U.S. M&A made up 50% of
the total.
– 69 deals over $10 billion, and 10 deals over $50 billion.
– Pfizer’s $160 billion acquisition of Allergan.
– Anheuser-Busch InBev’s $117 billion acquisition of SABMiller.
• Firm conduct




R&D
Advertising
Collusion
Erecting entry barriers

8. Profit maximization (Church ch2)

• Profit function:
R(q) C (q)
• First order condition for profit maximization:
0 MR(q ) MC (q )
q
• What if… cost reduction will dominate revenue
MR MC ?
reduction
MR MC ?
8

9. Perfect competition

• Assumptions: Large number of buyers and sellers, free entry,
identical goods, perfect information, no transport costs.
• Firms are price takers:
R(q) pq MR(q) p
• Profit maximization implies that q is such that – price is equal
to marginal cost:
p MC (q)

10. Perfect competition (another way to look at it, LWG)

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