Share 2.11 Market Power & Market Failure
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All firms maximize profits by producing at a quantity where...
MC = MR
For firms to be allocatively efficient, they produce where...
P or AR = MC (i.e. MB = MC)
Identify THREE risks associated with firms having market power.
Lower output, higher prices, reduced choices
Provide a real-life example in which a monopolist abuses its market power
Amazon to prioritise their own products over that of its partners, which could lead to restricted consumer choice
Provide a real-life example of a government fine to punish a monopolist for its anti-competitive behavior.
Chinese government imposes $2.8mm fine on Alibaba for restricting sellers from selling on other platforms
Identify THREE ways in which governments can respond to abuses of market power.
Legislation and regulation, government ownership, fines
Outline TWO reasons why market power might be beneficial for consumers
Economies of scale of natural monopolies, innovation
All firms maximize productive efficiency by producing at a quantity where...
MC = ATC
True or false: monopolists can make economic losses in the long run.
True
Identify TWO similarities and ONE difference between perfect vs. monopolistic competition
Similarities: many firms, no/insignificant barriers to entry, Differences: differentiated products
Briefly explain WHY market power results in market failure.
Rational firms maximize profits, and the profit-maximizing condition + price-setting ability causes firms to underproduce relative to allocative efficiency.
True or false: Monopolistic competitive firms can only make a normal profit in the long run.
True - insignificant barriers of entry.
