Chapter 4: Introduction
Market Power: An Example of Market Failure?

This chapter continues the development of the function of competitive markets by showing that a competitive market results in economic efficiency. Thus, the analysis of the price system and the analysis of demand and supply in Chapters 1 and 3, along with the efficiency analysis contained in Chapter 4 provide an introduction to the workings of a competitive market economy. When we teach the course, we cover these parts of these three chapters, even if we do not cover all three issues.

We then use Chapter 4 and Chapters 5 through 7 to consider market failure. The monopoly and market power analysis of this chapter shows one way that markets can result in inefficiency.

The issue raised in the chapter is market power in the U.S. economy. How important is it? We show that if market power exists in the U.S. economy, it exists mostly in oligopolies. How do oligopolies achieve monopoly-like results? We argue that they do so, ff they can act as ff they are in a cartel. The OPEC cartel is discussed because of its intrinsic interest and because it shows conditions necessary for a cartel to be successful.

If government is antagonistic to cartels or collusion--as it is in the United States--we conclude that competitive pressures will be intense in a large economy.

Instructional Objectives

After completing this chapter, your students should know:

1. The basic monopoly analysis, including a comparison of monopoly equilibrium with competitive equilibrium.
2. Elementary conclusions about competition and economic efficiency.
3. The source and extent of monopoly in the U.S. economy.
4. The conditions under which a cartel might succeed and be able to discuss OPECs history in light of cartel analysis.

Terms from Previous Chapters

You should review the terms in this section at the beginning of your discussion of the chapter.

economic rent seeking (Chapter 3)
political rent seeking (Chapter 3)
price taker (Chapter 1)
marginal benefit (Chapter 1)
marginal social benefit (Chapter 2)
marginal cost (Chapter 2)
marginal social cost (Chapter 2)
demand curve (Chapter 1)
supply curve (Chapter 1)
equilibrium (Chapter 2)
profit (Chapter 2)

Key Terms

These terms are introduced in this chapter:

market power
marginal revenue
marginal principle
competitive industry
efficient output
concentration ratio
barrier to entry
natural monopoly
antitrust laws

Additional References

In addition to the references in the text, instructors may wish to read or assign one or more of the following:

1. "A Survey of the Car Industry," The Economist (October 17, 1992).
2. Walter Adams, "Public Policy in a Free Enterprise Economy," Chapter 13 in Walter Adams, ed., The Structure of American Industry, 8th ed. (New York: Macmillan, 1990), pp. 349-376.
3. John Kenneth Galbraith, American Capitalism: The Concept of Counterrailing Power (Boston: Houghton Miffiin, 1952).
4. Steven Martin, 'q'he Petroleum Industry," Chapter 2 in Walter Adams, ed., The Structure of American Industry, 9th ed. (New York: Macmillan, 1994).
5. F.M. Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton Mifflin, 1990).
6. 'The Fall of Big Business" and "Japanese Cars at Day," The Economist (April 17, 1993), pp. 13-14 and 61-62.
7. Mine K. Yucel and Carol Dahl, "Reducing U.S. Oil-Import Dependence: A Tariff, Subsidy, or Gasoline Tax?" Federal Reserve Bank of Dallas Economic Review (May 1990), pp. 17-25.
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