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

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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 ?
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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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