MARKETS WITH MARKET POWER - Tufts University

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covered in the appendix). Table 2 and the graph use the notation “AR=Demand” which is not used in the text. (3 pages) 3. Extra exercise on “Monopoly Profit-Maximization” (suitable for in-class use or homework). and answer key. NOTE: The calculation of profit involves material covered in the appendix. (2 pages) 4. Question on Monopoly Profit Maximization, suitable for use on an exam, and answer key. NOTE: The calculation of profit involves material covered in the appendix. (1 page) 5. A handout on the “Cartel Game” and answer sheet NOTE: THIS EXERCISE HAS BEEN WRITTEN FOR A CLASS OF 36 STUDENTS. (3 pages) 6. Handout on the “Grading Game” (1 page) Chapter 12 − Markets with Power 10
Competition and Concentration There is a perpetual struggle between the forces of competition and the forces that tend toward concentration. (This will be discussed further in Chapter 16.) In one sense almost everyone is engaged in a “pan-human conspiracy” against competition: firm owners and managers don’t like it because it reduces profits, while workers don’t like it because firms that are being squeezed by competition become cost-cutters – and that usually includes making life less pleasant for the workers: faster pace of work, more supervision, and often reduced benefits, even reduced pay. (We have seen a great deal of this in the last decade, as global competition made more firms more “lean and mean.”) Most people, during most of their lives, share this owner/manager/worker point of view. At the same time, everyone is a consumer – and it’s consumers (and economists) who see competition as highly desirable, precisely because it gets firms to lower the prices of their products (which is why they are obliged to lower production costs.) Note that the advantages of bigness do not always produce high concentration, or allow firms to escape from the whip of competition. If the market for the product is large enough, or is growing fast enough, it may not produce monopoly or oligopoly. The monopolizing trend is most likely to win over the forces of competition when the market is not too big to overwhelm the advantages of large firm size. In any case, competition is not a stable situation: when it heats up, it tends to lead to shake-outs that encourage bigness and monopoly. That’s part of the explanation for the confusing picture we see when we look at global markets today. Competition seems to be increasing in many ways, as virtually all firms are competing against producers throughout the whole world; yet, at the same time, many firms have attained such enormous size that they have achieved significant power, even in the global market. Why and how do they attain such power? First of all, the motivations to escape the constraints of severe competition are very strong; corporate leaders work extremely hard, and can employ teams of very able people to help them, to figure out strategies that will give them market power. Given these strong motivations, corporate leaders also reach out to government officials who can help them, as well as to international bodies. While we see the big firms competing against one another for customers, at another level they recognize, and act on, a joint interest in reducing competition, and are often able to create and maintain local, national and international laws and regulations that can give them special advantages, or protections against would-be competitors or against constraints on their growth. Chapter 12 − Markets with Power 11
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MARKETS WITH MARKET POWER - Tufts University

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