Market Power (15)

 As seen in the diagram, the firm will operate at MR = MC (the profit maximising level of output). At an output level of G, the firm is able to charge a price of B which is much higher than the competitive market equilibrium price of A. As a result, firms make abnormal profits equal to ABCD, increasing their producer surplus and thus reducing the consumer surplus. With the firm not having to operate at the allocative efficient point E, there is also a welfare loss of CEF in the form of productive inefficiencies, higher prices, and less choices.  

The first major concern of large firms with significant market power is the potential negative impact on consumers. Large firms, like those in a monopoly or oligopoly, can manipulate prices due to their unchallenged position. For example, in the pharmaceutical industry, firms like Martin Shkreli’s Turing Pharmaceuticals have exploited their market power to dramatically increase drug prices, affecting consumers adversely. This means consumers need to pay high prices for life saving drugs, either reducing their disposable income for those who can afford them, or leading to some people not able to access the medicine anymore. On the other hand, it’s important to note that not all firms with market power abuse their profit making ability. Many firms, especially those in pharmaceuticals may reinvest their supernormal profits into research and development, potentially leading to new and improved products for consumers. 

Secondly, the presence of large firms with significant market power can deter competition. High barriers to entry, predatory pricing, or other anti-competitive practices may prevent new firms from entering the market. For example, Google has been accused of using its dominant position in the search engine market to promote its own services over those of competitors. This restricts choices for consumers and could force them to use the only product available to them, limiting their potential gain from a wider variety. However, this dominance also allows large firms to benefit from economies of scale, a concept that refers to the cost advantage that a business obtains due to its scale of operation, potentially leading to lower prices for consumers. For instance, Amazon’s vast global delivery network allows it to offer lower prices and quicker delivery times than many of its competitors. The vast supernormal profits could also be used to innovate and develop even more variety of products, yet this depends on the nature of the firm and whether it is in their interest or not.

Lastly, while large firms with significant market power can pose challenges to consumers and competition, they can also contribute positively to the economy. These firms often generate substantial tax revenue and create jobs. For example, Apple, one of the world’s largest companies, employs over 100,000 people directly and contributes significantly to the U.S. tax revenue. The US government can then use this money to fund social programs and subsidise other firms/industries. However, their substantial influence and power can lead to regulatory challenges around tax avoidance and unfair practices and, in some cases, calls for antitrust action to reduce their market power. Moreover, the concentration of wealth and income within these large firms can exacerbate income inequality. The wealth amassed by the owners and top executives of these firms, such as Jeff Bezos of Amazon and Elon Musk of Tesla, stands in stark contrast to the median wages of their employees, highlighting this issue.

In conclusion, the presence of large firms with significant market power can have both positive and negative impacts. Policymakers are tasked with the difficult job of balancing these factors, promoting competition and consumer welfare without stifling economic growth and innovation.