Dominant firms

• Dominant firm


  A firm that has a significant share of the market and can influence the market price
• Competitive fringe


  Smaller firms that are price takers and cannot influence the market price
• Durable goods monopoly


  A monopolist that sells a product that can be used multiple times and provides a stream of consumption services

  
• Sources of market power

  • Government restrictions on entry
  • Structural characteristics
  • Strategic behaviour by incumbents
• Government restrictions on entry

  1. Natural monopoly

  2. Source of revenue

  3. Redistribute rents

  4. Intellectual property rights
• Structural characteristics that are entry barriers

  • Economies of scale
  • Sunk expenditures of the entrant
  • Absolute cost advantages
  • Sunk expenditures by consumers and product differentiation
• Dominant firm with a competitive fringe

  1. Dominant firm has a cost advantage or superior product

  2. Competitive fringe are price takers

  3. Competitive fringe's supply corresponds to their MC curves

  4. Competitive fringe dampen but don't eliminate dominant firm's control over price

  
• Expansion of the competitive fringe

  Decreases the market power of the dominant firm
• Coase conjecture


  Durability and consumer expectations can substantially reduce or eliminate the market power of a durable goods monopolist
• Assumptions of Coase conjecture

  • Durable good lasts forever and does not depreciate
  • Good in fixed supply
• Monopoly supply of durable goods

  1. Monopolist sells some units in first period at high price

  2. Monopolist withholds remaining units

  3. Monopolist sells remaining units in second period at lower price

  
• Strategic consumers


  Consumers have an incentive to delay purchasing if they expect prices to fall over time
• Strategies to mitigate the Coase conjecture

  • Leasing
  • Reputation
  • Contractual commitments
  • Limit capacity
  • Production takes time
  • New customers
  • Planned obsolescence
• Pacman strategy


  Monopolist sells to consumers sequentially in order of their reservation prices
• Market characteristics


  • Large number of buyers with small differences in willingness to pay favour Coase-like outcomes
  • Small number of buyers with large differences in willingness to pay favour Pacman discriminatory outcomes
• Recycling


  Recycling of the durable good can constrain the market power of the monopolist
• Costs associated with market power

  • X-inefficiency (managerial slack)
  • Rent seeking
• Rent seeking expenditures can lead to complete rent dissipation
• Benefits of monopoly


  • Scale economies
  • Research and development