Industrial Economics

This assignment explores Industrial Economics. It is divided into three sections. The first section looks at the concept of market power and how it can be used to advantage by firms in an industry. The second section looks at the different types of market structures that can exist in an industry and how these impact on the competitiveness of the firms within that industry. The third section looks at some of the key elements of game theory and how these can be applied to understand behavior in an oligopoly.

What is market power?

Market power is the ability of a firm to profitably raise prices above the level that would prevail in a perfectly competitive market. A firm with market power is said to have monopoly power. There are a number of ways in which a firm can acquire monopoly power. The most obvious is to be the only producer of a good or service, as is the case with public utilities. Another way a firm can acquire monopoly power is through ownership of key inputs into the production process. For example, a firm that owns a valuable mineral deposit or a patent on an innovative technology may be able to charge higher prices for its products than firms that do not have access to these inputs.

Market power can also be acquired through government regulation. For example, local taxi companies are typically given exclusive rights to operate in their service area. This gives them market power over other potential providers of taxi services, such as Uber.

What are the benefits of market power?

There are a number of benefits that can accrue to a firm with market power. Firstly, the firm can earn higher profits than would be possible in a perfectly competitive market. Secondly, the firm can use its market power to expand into other markets or to diversify its product range. For example, a local monopoly might use its market power to open up a new line of business in a nearby town. Thirdly, the firm may enjoy greater stability and predictability in its sales and profits. This can make it easier for the firm to obtain finance from banks and other investors.

What are the costs of market power?

There are also a number of costs associated with market power. Firstly, the firm may find it difficult to compete against new entrants if they decide to enter the market. Secondly, the firm may become complacent and inefficient, leading to higher costs and lower quality products. Thirdly, the firm may abuse its market power by engaging in anti-competitive practices, such as price discrimination or exclusive dealing. This can lead to a loss of customer goodwill and damage to the firm's reputation.