In this activity, we consider the issue of Market Power exercised by monopolists or by firms in monopolistically competitive markets. This issue aims to understand how this phenomenon affects individuals as we refine our thoughts about regulatory efforts to restrain anticompetitive behavior by powerful firms.
Market power exists because firms are protected by numerous entry barriers, allowing them to maintain their position in a relatively unchallenged market. For instance, early entrants into an industry may establish a network of users that effectively discourages individuals from choosing an alternative. Consider how prevalent Microsoft Office Products such as Excel, Word, and PowerPoint are, for instance. At the same time, powerful firms often lack competition once they achieve a privileged position in an industry. This position might also be the result of access to patents, technology, economies of scale, costs of entering a certain line of business, or other factors.
The United States (U.S.) Congress has passed various antitrust regulations to address consumers’ economic harm resulting from monopoly or other market power. Antitrust regulation aims at restricting the anticompetitive behavior by powerful firms and protect consumers. A monopolist sets its prices in the elastic region of a demand curve, extracting consumer surplus, and earning excess profits. It is also likely to restrict output. Policymakers realize that market power is damaging to consumers, and so various agencies regulate anti-competitive activities in the public interest. Policymakers realize, however, that regulation has important limitations.
Consider an example of a firm or firms that, in your experience or to your knowledge, has/have clearly established significant power within a market.
Describe this firm and identify characteristics of which of the four market types the firm functions within and why you believe this firm’s market can be characterized as the type of market you describe.
Determine whether product variation exists in this market and how this weakens the power of firms in the market to act as price makers.
Explain whether the firm or firms you describe abuse or do not abuse their power and the impact of this behavior on consumers and whether you would advocate for increased governmental oversight of such industries, and why.