Sources of Monopoly Power

Monopoly power is the ability to set prices above marginal cost and that the amount by which price exceeds Marginal cost depends inversely on the elasticity of demand facing the firm.
The less elastic the demand curve , the more monopoly power a firm has.

Firm’s elasticity of demand is measured by 3 factors-

1. The elasticity of market demand
-when there is only 1 firm(pure monopoly), its D curve is the market demand curve and its elasticity determines the monopoly power.
- when there are several firms,then the elasticity of market demand sets a lower limit on the on the magnitude of elasticity of each firm.

2. Number of firms in the market
- monopoly power will decrease with the increase in the number of firms.

3. The interaction among firms.
- Monopoly power is determined by the competition these firm have in between.
- High Competition will lead to high monopoly power.

1 comment:

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