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Topic 10: COMPETITIVE CONSTRAINTS AND MARKET POWER

A ntitrust Economics 2013. David S. Evans University of Chicago, Global Economics Group. Elisa Mariscal CIDE, Global Economics Group. Topic 10: COMPETITIVE CONSTRAINTS AND MARKET POWER. Topic 10| Part 1 12 September 2013. Date. Overview. Competitive Constraints and Market Power.

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Topic 10: COMPETITIVE CONSTRAINTS AND MARKET POWER

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  1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, Global Economics Group Topic 10: COMPETITIVE CONSTRAINTS AND MARKET POWER Topic 10| Part 1 12 September 2013 Date

  2. Overview

  3. Competitive Constraints and Market Power

  4. Definitions of Market Power

  5. Market Power and the Ability to Do Harm

  6. Market Power Provides a Screen

  7. The Quest for the Market Power Thermometer

  8. Supply = MC PM PC Demand QM QC Monopoly, Perfect Competition, and Market Power Monopoly price significantly above competitive levels And significantly above marginal cost P Textbook description of competitive industry but need to be careful in using in practice. MR Q

  9. Definition of Competitive Level

  10. Market Power in Antitrust and Mergers

  11. Level Versus Changes in Market Power Why we care about market power?

  12. Market Power and Competitive Constraints

  13. Competitive Constraints Can Limit Market Power

  14. Market Power and the Demand Side

  15. Demand Substitution and Economic Concepts

  16. “Marginal” not “Average” Consumers Matter

  17. Demand-Side Substitution and the Marginal Consumer O F is an “average consumer” of beer (from O to C) F A A,B, C, D are at “the margin” of buying or not buying beer D C B G G is not a consumer of beer at current prices

  18. Price-Cost Margin and Demand Elasticity Elasticity of demand for product x (for single-sided firm): ex= dqx/qx dpx/px Price – Cost mark-up (“Lerner condition” for product x: mx = px – cx = 1 pxex Notes: Elasticity of demand for a profit maximizing firm has to be greater than 1.0 (in absolute value); so demand is relatively more inelastic as it is closer to 1.0 and relative more elastic as it is farther than 1.0

  19. Markups and Fixed Costs Percent markup must be greater than or equal to fixed costs as a proportion of sales for a firm to cover its costs and make a profit mx ≥ F pxx Example based on constant marginal costs and linear demand.

  20. Practical Assessment of Demand Substitution

  21. Special Factors on Demand-Side

  22. Market Power and the Supply Side

  23. Supply Substitution

  24. Elasticity of Supply and Competitive Fringe ex = eM + (1 – sx)ef sx where: Sx is the share of the dominant firm, ef is the elasticity of demand of the fringe, and, eM is the elasticity of demand of the market

  25. Barriers to Entry Debate

  26. Bain-Type Barriers to Entry

  27. Dynamic Competition

  28. End of Part 1, next week Part 2

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