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Sources of Market Power
What if products are not standardized?What if there are few sellers or buyers?
What if there are high barriers to entry or exit?
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Assumptions that Underlie Perfect Competition
4. Firms and consumers have perfect information.
What happens when we violate these assumptions…
1. Firms sell standardized products(commodities).
2. Firms are all price takers:no one firm’s actions can “move the market.”
3. There is free entry and exit of firms with perfectly mobile factors of production (capital and labor) in the long run.
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What if Products are NOT Standardized?
Experience Goods: Consumers do not know the utility until AFTER consumption.
Credence Goods: Consumers do not know the utility EVER – even after consumption.
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From: Elinor Ostrom (2010) “Beyond Markets and States:Polycentric Governance of Complex Economic Systems” Elinor Ostrom American Economic Review 100(3): 641 - 672
What if Products are NOT Excludable and/or Rival (Subtractable)?
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What if there are BIG economies of scale?
Natural Monopolies
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What if there are FEW customers?
Monopsony
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What if there are BARRIERS to ENTRY or EXIT?
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Standardized Product, High Barriers → Monopoly, Oligopoly
Diversified Product, Low Barriers → Monopolistic Competition
Standardized Product, Low Barriers → Perfect Competition
Diversified Product, High Barriers → Monopoly, Oligopoly
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Products
Products
Everywhere!1. Find products that are SIMILAR to yours in type of
goods/services.
2. Classify your group of products (commodity, credence, experience, common pool, other?)
3. Describe the market for the products – what is the elasticity of demand? Who has more power, producers or consumers?