Question

Suppose a friend is taking an economics course at another college or university and his professor uses a different textbook. Your friend, after learning about monopolies and the lost gains from trade that result from monopolies, becomes very agitated about firms with market power, and he makes this statement: "It should be strictly forbidden for any company, in any market, to have more than 50% market share-market power like this always leads to higher prices, deadweight loss, and inefficiency!" After you calm him down, how would you respond to this statement? Select all accurate responses.

a A firm may have a large market share because it is outcompeting other firms. If other firms can similarly innovate, then they will increase their market share, bringing better products at lower prices. b Significant market share is transient. If a firm is using market power to earn significant profits, then other firms will eventually enter the market and bring down prices.
c A credible threat of competition can force firms with large market shares to behave competitively.
d With some network goods, using a universal standard can increase efficiency.
e In many cases, market power leads to high prices, deadweight loss, and inefficiency.

Answer 1

While market power can lead to higher prices, deadweight loss, and inefficiency, there are factors that can counterbalance them and lead to competitive outcomes.

Step-by-step explanation:

The statement made by your friend is not entirely accurate. While it is true that market power can lead to higher prices, deadweight loss, and inefficiency, it is not always the case. There are several reasons why:

1. A firm may have a large market share because it is outcompeting other firms. If other firms can similarly innovate and offer better products at lower prices, they will increase their market share, promoting competition.
2. Significant market share is transient. If a firm is using market power to earn significant profits, then other firms will eventually enter the market and bring down prices.
3. A credible threat of competition can force firms with large market shares to behave competitively. If new firms enter the market or existing firms ramp up their competitiveness, the monopolistic firm will have to lower prices and improve efficiency to maintain its market share.

Therefore, while market power can have negative consequences, there are factors that can counterbalance them and lead to competitive outcomes.