Question

Size of the firm is closely related with competitiveness of the firm, particularly in a global market. Using the concept of minimum efficient scale (MES) at long run average cost curve explain why firms in some industries can have market power to set price strategically than firms in other industries.

Answer 1

Minimum Efficient Scale (MES) is basically a single point on the long run average cost. At this point, the Average Cost is least. To the left if MES, the average cost declines and increases to the right of MES

The market power of a particular firm in terms of set the price strategically is given by its location on the long run average cost curve. Those firms would be able to set the price strategically who are closer and to the left of MES point on AC curve.

Such firms are called NATURAL MONOPOLIES. These firms are able to serve the whole market without the contribution from other firm. Continuously declining average cost curve gives immense market power to the firm to produce higher output at higher profits.

Firm which is exactly at MES does not possess market power and it earns a normal profit. Such a situation exist in Perfect Competition.

So the degree of the market power is negligible at MES. To the left of MES, the market power is higher and is concentrated to few firms. To the right of MES, Market power is low and the firms will find themselves exiting the industry due to huge losses.