The Welfare Consequences of Market Power

Much of industrial economics concerns consequences of market power-the ability of firms to influence the price of the product or products they sell. Here we review the basic economic theory of market power. To establish a reference point, we begin with an outline of the economics of competitive markets. We proceed to a discussion of monopoly. Part of this discussion will be familiar to most of you. We emphasize, however, certain concepts (the degree of market power and consumers’ surplus, among other) that are used repeatedly in industrial economics. Some of this material will be new for most of you. Even if it is a review, however, you are likely to find a new emphasis in our discussion.

After covering the basic theory of monopoly, we focus on the welfare consequences of market power. The chapter concludes with a discussion of economics’ efforts to measure these welfare consequences empirically.