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?

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.

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.

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)?

What if there are BIG economies of scale?

Natural Monopolies

What if there are FEW customers?

Monopsony

What if there are BARRIERS to ENTRY or EXIT?

Standardized Product, High Barriers → Monopoly, Oligopoly

Diversified Product, Low Barriers → Monopolistic Competition

Standardized Product, Low Barriers → Perfect Competition

Diversified Product, High Barriers → Monopoly, Oligopoly

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?