Charging different prices to different buyers for identical goods is price discrimination. Video
Second Degree Price DiscriminationCharging different prices to different buyers for identical goods is price discrimination. - were
Pricing power[ edit ] Alternative theories include that prices reflect relative pricing power of producers and consumers. A monopoly may set prices so as to maximize monopoly profit , while a cartel may engage in price fixing. Conversely, on the consumer side, a monopsony may negotiate or demand prices that do not reflect the cost of production. Main article: Theory of value economics A long thread in economics from Aristotle to classical economics to the present distinguishes between exchange value , use value , price, and sometimes intrinsic value. It is frequently argued that the connection between price and other types of value is not as direct as suggested in the theory of price signals, other considerations playing a part. In the business, to with the help of price signals, we can constantly adjust the production and operation decisions of business, adjust the allocation direction of resources, and promote the balance of total social supply chain and total social demand chain. In the market, with the help of price, the information of market supply and demand can be directly transmitted to enterprises, and enterprises organize production and operation according to the market price signal. Moreover, the level of price determines the degree of realization of value, which is an important symbol of the sales situation of goods in the market. Speculation[ edit ] Financial speculation , particularly buying or selling assets with borrowed money, can move prices away from their economic fundamentals.Legal regulations [13] A well-known example of monopolistic market power is Microsoft's market share in PC operating systems. The United States v. Microsoft case dealt with an allegation that Microsoft illegally exercised its market power by bundling its web browser with its operating system. In this respect, the notion of dominance and dominant position in EU Antitrust Law is a strictly related aspect. Within this market structure, the market is highly iddentical and several firms control a significant share of market sales.
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Homogenous or differentiated products. Barriers to entry. This includes, but is not limited to, 'technology challenges, government regulations, patents, start-up costs, or education and licensing requirements'. It is salient to note that only a few firms make up the market share.
Hence, their market power is charging different prices to different buyers for identical goods is price discrimination. as a collective and each firm has little or no market power independently. The graph below depicts the kinked demand curve hypothesis which was march on washington essay by Paul Sweezy who was an American economist. Kinked Demand Curve Oligopolistic firms are believed to operate within the confines of the kinked demand function. A group of firms that explicitly agree to affect market price or output is called a cartel.
Sources of Market power[ edit ] There are several sources of market power including: High barriers to entry. These barriers include the control of scarce resources, increasing returns to scale, technological superiority and government created barriers to entry. Increasing returns to scale. Firms that experience increasing returns to scale also experience decreasing average total costs and therefore become more profitable with size. This barrier makes it difficult for new entrants to succeed. Firms like power, cable television and telecommunication companies fall within this category. A firm seeking to enter such industries require the ability to spend millions of dollars before starting operations and generating revenue. Brand loyalty of consumers and value placed by consumers on reputation. Incumbent firms often have a competitive advantage over new entrants. An incumbent firm can engage in several entry-deterring strategies such as limit pricing, predatory pricing and strategic bundling.
Microsoft has substantial pricing or market power due to technological superiority in its design and production processes. A prime example are patents granted to pharmaceutical companies. These patents give the drug companies a virtual monopoly in the protected product for the term of the patent. Measurement of Market power[ edit ] Measuring market power is inherently complex because the most widely used measures are sensitive to the definition of a market.
Concentration ratios[ edit ] Recent macroeconomic market power literature indicates that concentration rations are the most frequently used measure of market power. N-firm concentration ratio[ edit ] The N-firm concentration ratio gives the combined market share of the largest N firms in the market. For example, a 4-firm concentration ratio measures the total market share of the four largest firms in an industry.
In order to calculate the N-firm concentration ratio, one usually uses sales revenue to calculate market share, however, concentration ratios based on other measures such as production capacity may also be used. For a monopoly, the 4-firm concentration ratio is per cent whilst for perfect competition, the ratio is zero. An advantage of concentration ratios as an empirical tool for studying market power is that it requires only data on revenues and is thus easy to compute. The corresponding disadvantage is that concentration is about relative revenue and includes no information about costs or profits.
Herfindahl-Hirschman index[ edit ] The Herfindahl-Hirschman index HHI is another measure of concentration and is the sum of the squared market shares of all firms in a market.]
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