Chapter 8 Econ Notes

Market power is the ability of a firm to influence the prices of its product and develop other competitive strategies that enable it to earn large profits over longer periods of time.

Monopoly is a market structure characterized by a single firm producing a product with no close substitutes.

Price-searcher is a firm in imperfect competition that faces a downward sloping demand curve and must search out the profit-maximizing price to charge for its product.

Barriers to entry are the structural, legal, or regulatory characteristics of a firm and its market that keep other firms from producing the same or similar products at the same cost.

Public goods have a higher cost of exclusion and are nonrival in consumption.

Costs of Exclusion are the costs of using a pricing mechanism to exclude people from consuming a good if they do not or cannot pay the price of the good.

Nonrival consumption. Once a nonrival good is provided, everyone can consume it simultaneously (i.e. – one person's consumption of the good does not affect the consumption of that good by another person). E.g. – information.

Lock-in and switching costs is a form of market power for a firm where consumers become locked into purchasing certain types or brands of products because they would incur substantial costs if they switched to other products.

Network externalities. A barrier to entry that exists because the value of a product to consumers depends on the number of consumers using the product.

Lerner index. A measure of market power that focuses on the difference between a firm's product price and its marginal cost of production.

Concentration ratios are a measure of market power that focuses on the share of the market held by the X largest firms, where X typically equals four, six or eight.

Herfindahl-Hirschman Index (HHI). A measure of market power that is defined as the sum of the squares of the market share of each firm in an industry.

Antitrust laws. Legislation, beginning with the Sherman Act of 1890, that attempts to limit the market power of firms and to regulate how firms use their market power to compete with each other.