Deck 13: Market Power

Question 1

Check out the Census Bureau Web page that focuses on concentration ratios (http://www.census.gov/epcd/ www/concentration.html). Can you find concentration ratios for markets that are not reported in this book? Find one market you are interested in and determine whether it is competitive or concentrated. By the time this book is published, you may be able to find updated concentration rations for the year 2007.

Answer 1

To assess the market power one best way is to measure the concentration within a particular market. The concentration is measured by the means of the concentration ratio. The concentration ratio is given by the percentage of output produced by the four largest firms in an industry. The higher the concentration ratio the greater will be the concentration in the industry.
Concentration ratios of selected manufacturing industries:
Many economists consider a concentration ratio above 60 to indicate a tight Oligopoly in which firm have significant market power. This means the 4 large firms produce 60% of the total product produced in the industry. Here we see that the apparel manufacturing industry is competitive as 4 large firm produce 7% of the total industry output.

Question 2

Go to the Web site of the American Antitrust Institute at http://www.antitrustinstitute.org. This institute is an independent Washington-based nonprofit organization dedicated to education, research, and advocacy to assure competition and challenge unduly concentrated power in the U.S. and world economies. Read the organization's mission on its home page. Would you say that this is a liberal, conservative, or centrist organization?

Answer 2

Conservatives and liberal economists differ greatly in their attitudes towards market power, antitrust activities and economic regulation. Conservatives believes in limited government activity in the economy, thus they don't believe in antitrust and economic regulation. They feel that the market power is not a serious problem and that the barriers to entry is not too high so that it can eliminate the threat of competition from new firm entering into the industry.
Liberals believes that competition creates efficiency, and that the government must act to reduce the market power that impedes competition there is greater liberal support for active antitrust policy and government regulatory authority.
The American Antitrust Institute is a non-profit education, research, and advocacy to assure competition and challenge unduly concentrated power in the U.S. and world economy. According to the web site it is a centrist legal-economic ideology organization that promotes competition to protect the interests of the consumers.

Question 3

Google purchased YouTube for $1.6 billion in 2006. Now, in addition to a search engine, Gmail, calendar, chat room, and other applications and tools, Google owns the popular video-sharing Web site. What implications might this purchase have for market power and concentration?

Answer 3

The merge between Google and YouTube is the example of product extension merge. A product extension merge is between two business organizations that operates in the same market and produces and deals with same product. The market power is the ability of an individual firm to influence the market price of its product.
As Google is leading search engine and YouTube is an leading video-sharing web site, as they marge together, Google now have greater power to influence the price and as two large firm merge Google now produce a larger market share and the concentration ratio has also gone up.

Question 4

What characteristics are necessary for a market to be competitive? Are there many competitive markets in the real world?

Question 5

What are the disadvantages of market power for society? (Hint: Discuss price, output, profits, price discrimination, etc.)

Question 6

What are barriers to entry? Why must barriers to entry be present if market power is to exist in a particular market?

Question 7

Discuss the following barriers to entry: (a) economies of scale, (b) exclusive franchises, (c) control of essential raw materials, (d) patents, (e) product differentiation, (f) licenses, and (g) price-cutting. Describe how each functions as a barrier to entry by new firms.

Question 8

Can you think of any examples of price-cutting that may exist in your community? Are you aware of any such activity involving some of the products that you purchase?

Question 9

What are some examples of product differentiation in industries other than those discussed in the text? Especially think in terms of some of the products that you purchase.

Question 10

Can you think of other examples of price discrimination besides those mentioned in the text? What about the way that airlines charge their business clients one price (noting that businesspeople often purchase fares just before they travel and that they have little flexibility in when and whether they travel) versus fares charged to vacationers (who often have alternative means of travel, choice over the time of travel, and the ability to purchase tickets in advance)? Can you explain the different fares charged by the airlines in terms of price discrimination?

Question 11

Can you explain why adult and child moviegoers are often charged different amounts when going to the movie theater, keeping in mind that both an adult and a child each takes up an entire seat?

Question 12

How do tariffs and import quotas harm the consumer? How do they harm the U.S. worker?

Question 13

Are you a liberal or a conservative with respect to antitrust and economic regulation?

Question 14

You are undoubtedly aware that most of the tickets that you purchase for rock concerts and other events go through Ticketmaster, and, of course, there is always a fee connected with this. Do you believe that Ticketmaster uses its market power to charge unnecessarily high fees for its service? Do consumers (and rock bands) have any alternative to using Ticketmaster? Are you aware of any bands that have chosen to supply their tickets without using Ticketmaster? If so, how successful have they been? One forum for views about Ticketmaster is on Wikipedia, the free encyclopedia, at http://en.wikipedia.org/wiki/Ticketmaster.

Question 15

Open the Department of Justice's antitrust page (http:// www.usdoj.gov/atr), and click What's New. List the new cases that have been initiated.

Question 16

Go back to the Department of Justice Web site at http:// www.usdoj.gov/atr. Find the page that explains how to report possible antitrust violations or potential anticompetitive activity. Read the confidentiality page with respect to reporting violations.