1Econ 101 M. SalemiEcon 101 M. SalemiMarket PowerMarket PowerNewsNewsIn Most Markets, Buyers and Sellers Are Not In Most Markets, Buyers and Sellers Are Not Price Takers.Price Takers.Sources of Market Power.Sources of Market Power.Price Setters Face a Tradeoff when They Price Setters Face a Tradeoff when They Decide How Much to Sell.Decide How Much to Sell.Market Power diminishes Economic Market Power diminishes Economic EfficiencyEfficiencyWhat Have We Learned?What Have We Learned?Econ 101 M. SalemiEcon 101 M. SalemiPerfect Competition is the Perfect Competition is the Absence of Market PowerAbsence of Market PowerIn a perfectly competitive market, the price of In a perfectly competitive market, the price of a good is determined by supply and demand.a good is determined by supply and demand.No seller can influence price. If a sellerNo seller can influence price. If a seller’’s price s price is above the market, buyers go elsewhere.is above the market, buyers go elsewhere.No buyer can influence price. If a buyer seeks No buyer can influence price. If a buyer seeks a discount, sellers refuse.a discount, sellers refuse.The best examples of competitive markets are The best examples of competitive markets are commodities markets.commodities markets.Econ 101 M. SalemiEcon 101 M. SalemiMost Markets Are Not Perfectly Most Markets Are Not Perfectly Competitive.Competitive.Some buyers do not think that Some buyers do not think that CokeCokeTMTMand and PepsiPepsiTMTMare close substitutes. They are are close substitutes. They are brand conscious.brand conscious.Because of buyer brand loyalty, sellers have Because of buyer brand loyalty, sellers have some latitude to set the price of their some latitude to set the price of their products. products.2Econ 101 M. SalemiEcon 101 M. SalemiIn the Soft Drink Market, Firms Face In the Soft Drink Market, Firms Face Downward Sloping Demand Schedules.Downward Sloping Demand Schedules.Quantity QuantityDemandMarket pricePriceDemandPerfectly competitive firmWheat FarmerImperfectly competitive firmSoft Drink ManufacturerMarket Power IsMarket Power Is……The ability of a seller The ability of a seller to raise its price relative to its rivals to raise its price relative to its rivals without losing all of its sales.without losing all of its sales.Econ 101 M. SalemiEcon 101 M. SalemiUse Your Clicker To AnswerUse Your Clicker To AnswerThe Following The Following Graded Question.Graded Question.Econ 101 M. SalemiEcon 101 M. SalemiWhich of the following soft drink Which of the following soft drink sellers is likely to have the most sellers is likely to have the most market power?market power?A.A.Concession Area at the Smith Center.Concession Area at the Smith Center.B.B.Franklin Street Snack Shop.Franklin Street Snack Shop.C.C.Lenoir Dining Hall.Lenoir Dining Hall.D.D.Food Court at A Shopping Mall Like Food Court at A Shopping Mall Like Streets of South PointStreets of South Point3Econ 101 M. SalemiEcon 101 M. SalemiThe Concessionaire at the Smith The Concessionaire at the Smith Center has the most market power.Center has the most market power.Smith Center policy prohibits fans from Smith Center policy prohibits fans from bringing any food or drink into the Center.bringing any food or drink into the Center.Fans have very few substitutes available for Fans have very few substitutes available for Smith Center Fizzy Drinks. Smith Center Fizzy Drinks. Econ 101 M. SalemiEcon 101 M. SalemiMarket Power is Market Power is inversely related inversely related to the to the availability availability of substitutes.of substitutes.Econ 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerExclusive control over inputs.Exclusive control over inputs.Patents and Copyrights.Patents and Copyrights.Government licenses or franchises.Government licenses or franchises.Economies of scale.Economies of scale.Network economiesNetwork economiesEcon 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerExclusive control over inputsExclusive control over inputs4Econ 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerPatents and CopyrightsPatents and CopyrightsEcon 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerGovernment Licenses or FranchisesGovernment Licenses or FranchisesFrom New York Times ArchiveFrom New York Times ArchiveEcon 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerEconomies of ScaleEconomies of ScaleEcon 101 M. SalemiEcon 101 M. SalemiSources of Market PowerSources of Market PowerNetwork EconomiesNetwork EconomiesFrom New York Times ArchiveFrom New York Times Archive5In a perfectly competitive industry, In a perfectly competitive industry, a firm will adjust quantity supplied until a firm will adjust quantity supplied until marginal cost equals market price.marginal cost equals market price.Econ 101 M. SalemiEcon 101 M. SalemiMCPricePrice andMCQuantityWhen the firm raises quantity by one unit,When the firm raises quantity by one unit,Marginal Benefit = Marginal Benefit = Market PriceMarket PriceMarginal Cost = Marginal Cost = Marginal Cost of Production Marginal Cost of Production and Salesand SalesEcon 101 M. SalemiEcon 101 M. SalemiMCPricePrice andMCQuantityEcon 101 M. SalemiEcon 101 M. SalemiIn an imperfectly competitive industry, In an imperfectly competitive industry, a firm faces two consequences when it a firm faces two consequences when it increases quantity supplied.increases quantity supplied.It must pay the marginal cost of the It must pay the marginal cost of the increased production.increased production.It must lower price to sell the It must lower price to sell the increase production.increase production.Econ 101 M. SalemiEcon 101 M. SalemiA firm with market power faces two A firm with market power faces two consequences when it increases the consequences when it increases the quantity it produces.quantity it produces.Price ($/unit of output)Quantity (units/week)6Demand312 24Marginal Cost2486Marginal RevenueMarginal RevenueMarginal revenue is the change in a Marginal revenue is the change in a firms total revenue that occurs firms total revenue that occurs when the firm increases output when the firm increases output and sales by one unit.and sales by one unit.Econ 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiUse Your Clicker Use Your Clicker To Answer The Following To Answer The Following Graded