Question

4. a. Explain where market power comes from and how high prices can go when there is limited or no competition.

b.Explain the features of the 4 market structures we have covered so far (#of buyers/sellers, market power, etc.).

C.Describe credible threats and cheap talk. Explain the advantage that credibly communicating with another player might give you and if/how it could change the outcome of the game.

Answer 1

4.A. The market power define as a company relative ability to exploit the price of an item in market place by manipulating the level of demand and supply. In simple words we can say that market power is the ability of a firm to profitable raise the market price of goods and services over marginal cost. There are various types of system in economic in which firm have varying ability to control price, like in perfect competition there are many firms and those firms sell a homogenous product to make normal profit.Then a Monopoly is best example of an firm with considerable market power. In Monopoly market firms can increase price by reducing its level of output these results in increase in demand of product. In oligopoly there are few large firms which sells both homogenous as well as differentiated product. This firm's do the agreement to share the market power. A firm with total market power can raise price without losing any customer to competitors.

B. Features of 4 Market Structure-

1). Perfect Competition

• ​​​​​There are large numbers of buyers and sellers in market.
• There is free entry and exit of firms from the market.
• Homogeneous product are sell by firms.
• No Consumer preference.
• Perfect Knowledge.
• In this market firms are price takers and industry is price maker.

2). Monopolistic Competition

• There are large numbers of buyer and sellers.
• Product differentiation.
• There is free entry and exit of firms.
• Consumer may prefer one product over other.
• High Selling Cost.
• All firms maximize profit.

3). Oligopoly

• There are few firms in market.
• Large number of buyers .
• There is entry barriers.
• Price Rigidity.
• There is interdetermined demand curve.

4). Monopoly

• There are One Seller and Large numbers of buyers.
• There is restrictions on entry of new firms.
• No close substitute available
• There is price discrimination
• And firm is price makers in this market.

C. A threat that the maker is expected to carry out, Credible threat is more if its execution has begun so that marginal cost of completion is modest and lower than direct benefit expected from target compliances. Game theory offers a perspective analysis and modeling of interactions. It is discipline that studies decision-making of interactive entities. The advantages of credible communication with another player is some player may win by getting positive gain while another may loss and there the outcome of game May change for one.