Lec 2 - Different Types of Markets - Delhi School of Economics

608: Economics of Regulation

Lecture 2: Market, types, Perfect Competition vs. Monopoly,

Regulatory Issues

S u g a t a

B a g

D e l h i

S c h o o l

o f

E c o n o m i c s W i n t e r

S e m e s t e r

2 0 1 3

VVH: 4 & 11

Outline

? Market ? DefiniCon ? Market ConcentraCon ? Perfect CompeCCon and Economic Surplus

? What is a natural Monopoly?

? Permanent vs temporary natural monopoly

? Natural Monopoly pricing problem ? MulC--product monopolists

? Monopoly and Deadweight Losses

? X--inefficiency

? EsCmates of welfare losses of monopoly

? Technological change and CompeCCon

? Patents and Copyright

2

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2013

DeDinition of a Market

? This is something not easy. ? IdenCficaCon of real markets can be done by:

o physical characterisCcs of firms' products

o the technology/raw materials employed

o the cross price elasCcity of demand between products

o staCsCcal definiCon (SIC figures)

? SIC system [ITC (HS) codes] {see: h\p://exim.sic--codes/ }

Code

Title

51

InformaCon

513

BroadcasCng and TelecommunicaCons

5133

TelecommunicaCons

51332

Wireless TelecommunicaCons carriers (except satellite)

3

513321

Paging

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2013

How market works?

Structure--Conduct--Performance

STRUCTURE ConcentraCon Product DifferenCon Entry

CondiCons

(barriers)

CONDUCT Pricing

AdverCsing R & D

PERFORMANCE Efficiency

Technical Progress

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GOVT POLICY AnCtrust

Economic RegulaCon

Ref: VVH: 3 pp. 62--69 (skim) 4

- Delhi School of Economics -

2013

Measurement of Concentration

? ConcentraCon RaCo: CRx, mkt share of largest x firms.

o Easy to measure

? Herfindahl index:

H=si2

where si=mkt share of ith firm

o

Ideal properCes

o

Numbers equivalent property

?

Herfindahl Hirschman Index: HHI=(100si)2

qHHI=(100si)2=10000 si2

qUsed by the Department of JusCce AnC--Trust Division

qNote connecCon with N--firm Cournot Model

v P - MCi P

=

si

where

si

=

1 ; n

i

si

[

P

- MCi P

]

=

HHI

10000.

v Mkt power depends on entry condiCon, product differenCaCon,

and conduct through collusion/ compeCCon

5

Sugata Bag

- Delhi School of Economics -

2013

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