Market structure, market power, and welfare ( lecture 2 )
1. Lecture 2: Market structure, market power, and welfare
2. Outline• Perfect competition and monopoly.
– 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 structures3
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
– 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
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 )
• What if… cost reduction will dominate revenue
MR MC ?
MR MC ?
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)