Question

I need new and unique answers, please. (Use your own words, don't copy and paste), Please Use your keyboard (Don't use handwriting) Thank you..

a. Describe in your own words the concept of market power.

b. Provide an example of a firm exercising its market power.Referring to your example above, answer the following questions:

1. What are the sources of the firm's market power?
2. Can they be sustained over a short run / long run?

c. Answer the question below in your conclusion:

• Why is it hard for a firm to maintain market power over a Long Run?

Answer 1

a. Market power is defined as the ability of a seller or a buyer to influence the market. In case of a perfectly competitive market, there are large number of buyers and sellers, hence the effect of any single buyer or seller to influence the market is negligible. However, in the case of market power, there are either one buyer and many sellers or one seller and many buyers. When in a market, there is only one buyer and many sellers, we call it a monopoly and when in a market there is only one buyer and many sellers then we call it monopsony. These are two forms of market powers where certain groups have power to influence the market.

b. When a new medicine is developed for say fever, which is more effective than the existing drugs, then doctors will prescribe that medicine to patients and despite the fact that there are already a number of drugs available for general fever, this particular medicine will charge a higher price than its competitors and can still exist in the market. In this way, market power will exist.

Now the sources of market power are:

The elasticity of market demand: In other words the less elastic the demand for a particular product, the more market power that firm can have. the demand for sugar or rice are elastic, then if producers of sugar or rice try to raise a higher price and practice market power then they will fail but on the other hand, as the demand for a rare medicine is highly inelastic then the producer of that drug can easily practice market power.

The number of firms: As more and more firms compete with each other in a market, then if one firm tries to practice market power, he will fail. However, if there are many firms and few of the firms hold majority of the market share then we can say that those firms have market power. That's why many firms use different methods of barriers to entry such as patent to practice market power.

Integration among firms: If there are many firms in the market and everyone charges prices of their products aggressively, then the resulting market price will go down to the competitive level and no firm can practice market power. So it's important how firms are interacting with each other.

c. In the long run, it is impossible to practice market power as there will be a higher number of entrants in the market and all the factors of production will become variable that is ceteris peribus assumption will not hold and practising market power , will mean an inefficient market outcome.