1. Market Power
Market power: ability of a firm to influence the prices of its products and develop strategies to earn profits over longer periods of time
Monopoly: single firm producing product with no close substitutes
Price-searchers: firms in imperfect competition

2. Monopoly Model with Positive Economic ProfitQ $
ATCM QM PM
Figure 6.1a D MR MC A
ATC B

3. Monopoly Model with Negative Economic ProfitQ $
ATCM QM PM
Figure 6.1b MR D MC B
ATC A

4. Monopoly Model
Monopolist maximizes profits by producing where MR = MC and earns positive economic profit due to barriers to entry
The monopolist could suffer losses if ATC is greater than price at the profit-maximizing level of output (previous slide)

5. Comparing Monopoly and Perfect Competition
Figure 6.2 MC
ATC
D=P=MR $
QPC Q QM MC Q1
ATC MR $ P1 P2

6. Comparing Monopoly and Perfect Competition
Monopolistic firm must seek out optimal price, which depends on demand and cost conditions
Firms with market power might pursue other profit goals
Price is higher and output lower under monopoly than under perfect competition

7. Barriers to Entry Economies of scale and mergers
Barriers created by government
Input barriers
Brand loyalties
Consumer lock-in and switching costs

8. Economies of Scale and Mergers
Exist when a firm’s LRAC slopes downward or when lower production costs are associated with larger scale of operation
Can act as a barrier to entry in different industries
Mergers are particularly important in technology, media, and telecommunications

9. Barriers Created by Government
Licenses
Patents and copyrights

10. Input Barriers Control over raw materials
Barriers in financial capital markets
Larger firms can get lower interest rates
Smaller firms need more collateral for loans
Smaller firms are perceived as riskier

11. Consumer Lock-In and Switching Costs
When consumers become locked into certain types or brands and would incur substantial switching costs if they changed
Although lock-in types are dominant, they represent managerial strategies that can be used elsewhere to gain market power

12. Measures of Market Power
Managers can use measures to better understand the markets
Lerner Index: measure of market power that focuses on the difference between a firm’s product price and marginal cost of production
L = (P – MC) P

13. Antitrust Issues
Federal legislation that limits market power of firms and regulates how firms use their market power to compete
Major components of antitrust law:
Sherman Act of 1890
Clayton Act of 1914
Federal Trade Commission Act of 1914

14. Managerial Rule of Thumb: Understanding Antitrust Laws
Managers must work within antitrust constraints
Because of generalities and ambiguities, managers may not know whether their actions are illegal unless the government initiates litigation

15. Assumptions of Monopolistic Competition
Product differentiation exists among firms
Large number of firms exist
No interdependence exists among these firms
Entry by new firms is relatively easy

16. Monopolistic Competition, Long Run and Short run
Figure 6.3 $ Q1 Q P1 $ Q2 Q P2 D MR MC D MR MC
ATC
ATC

17. Managerial Rule of Thumb: Monopolistic Competition
Market Power in
Monopolistic Competition
Managers must develop a variety of strategies to maintain market power when faced with intense competition
They can exploit geographic advantages, offer improved customer service, become part of a cooperative to lower cost, and develop specialized niches