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Loughborough University Topic 1: Market Power & Dominant Firms - Essay Plans to all topics 1 exam questions with extra Textbook Notes included. £8.99
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1. Explain what is important in determining the extent of a dominant firm’s market power. (Main
focus should be on actual factors rather than what authorities use to determine this)
> Define market power -> Definition on this is in Q 2. Below (give a brief general overview)
> Explain why it is important to determine the extent of a dominant firm’s market power -> so they
do not abuse their market power -> Article 102 (slide 2/Section A definitions)
> Briefly explain there is a 2 step approach in determining if a firm is dominant:
- First define what the market is- SSNIP test (hypothetical monopolist test) is used to define the
market
- Second work out the market shares of the various firms in the market e.g. concentration ratio,
Herfindahl-Hirschman Index
> State dominant firm and competitive fringe model in words -> Use
‘Slides 17-19’
- Outline assumptions of the theory
> State Lerner index for the dominant firm -> Use ‘Slides 17-19’
- State how you would solve this – this is the profit function of the dominant firm which I would
differentiate and rearrange to get equation (3) – can see dominant firms market share affects the
Lerner index (hence market power) along with own ped, elasticity of supply of the fringe, market
share of fridge
- All the RHS variables are important in determining the extent of the dominant firm’s market power:
own ped, elasticity of supply of the fringe, market share of the fridge, market share of dominant
firm- can then explain how each affects LHS
- Explain how market shares linked to market power –direct relationship (easier to observe market
shares than get elasticities from the market – why competition agency may use this as a direct
relationship of market power)
- All these factors will be important in determining the extent of a dominant firms market power
hence their ability to set P > MC
> Criticism of this model is we have been thinking about a perishable good/ good that only lasts two
periods whereas when a product is durable things change- product durability affects market power
> Explain product durability case -> Use ‘Slide 21’
- 2 problems with durability: monopolist is in competition with itself and price consumers are willing
to pay depends on the price tomorrow
- Explain Coarse conjecture with diagram- crude analysis/ in words
- But may still be able to avoid this conjecture through strategies used by companies e.g. invest in a
reputation- Disney, being able to reduce the products durability
> Brief mention of other factors e.g. barriers to entry from extra reading if time/ other factors
> Conclude that factors such as market shares, own ped, elasticity of supply of the fringe are all
important in determining the extent of the dominant firm’s market power
> Market shares easier to use by comp authority (link to point above)
> Product durability may be seen as a important along with other factors such as investing in a
reputation
, 2. Explain how the durability of a product affects the market power of a monopoly. What types of
strategies can the monopoly employ in these circumstances?
> Define durable good, market power -> use ‘Slide 21’
- Market power: Market power is when a firm has the ability to raise and maintain prices above the
level that would occur under competitive conditions. It can be measured indirectly using market
shares or other measures such as a concentration ratio. (-> All in my own words)
> Explain durability creates two problems for a monopolist: the monopolist is in competition with
itself and the price consumers are willing to pay depends upon their expectations about the price of
the good tomorrow -> use ‘Slide 21’
> Explain Coase conjecture with the assumptions -> use ‘Slide 21’
> Explain diagrams -> use ‘Slide 22-24’
> When monopolist cannot set P > MC if there is an infinite number of periods, if the product lasts
forever and if the discount factor (δ ) = 1
> Explain strategies to avoid Coase conjecture- with examples to explain well -> use ‘Slide 25’
Conclusion:
> Coase conjecture shows under some extreme assumptions product durability can eliminate market
power of a monopoly/firm.
> Explain Coase conjecture may be unlikely to hold in reality- but can be used to explain how to limit
market power
> But in reality firms implement different strategies to counteract this such as investing in a
reputation, innovating products, leasing products, reducing a goods durability etc.
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