Market Power

I have been looking for a measure of market power.  There are many good micro economic texts that include generalities of market power.  For instance, “Microeconomic Theory, Basic Principles and Extensions”, Nicholson & Snyder, 10th Edition includes chapters dealing with monopolies and imperfect information.  While excellent material, it isn’t quite what I am looking for.

The measure that I have in mind is based upon demand and supply elasticity.  Consider gasoline or home heating fuel.  Demand tends to be inelastic.  This inelasticity that results from the high utility of fuels presents a level of market power on the supply side.  As well, economies of scale creates additional supply side power.

Elasticity is given as

    e = [Percentage Change in Quantity]/[Percentage Change in Price]  : Prose definition

       = (Δ%q)/(Δ%p)  : Algabreic definition

       = (dq/q)/dp/p)        : Calculus definition

      =  (dq/dp)*(p/q)    : Derivative definition

(It should be noted that the axis for elasticity are flipped from the standard supply and demand diagram axis.  The definition for elasticity places quanity on the independent axis.  The only significance is that of being acustomed to thinking about supply and demand in terms of price being on the horizontal axis.  And, because elasticity is defined in terms of the slope of the line, diagramatically it is slightly different from the customary diagram.)

 

With this in mind, high elasticity is a steeper slope.  For high elasticity, a small change in price is associated with a large swing in quanity.  HIgh elasticity is greater than one, e>1. 

For low elasticity, a large price change in necessary to affect quanity.  Low elasticity, or inelastic, is less than one, e<1.

Supply elasticity is typically positively sloped while demand is typically negatively sloped. 

Gasoline demand tends to have low demand elasticity, |e|< 1 or e > -1.  That is, relatively large market price changes do not appreciabely affect quanity demanded. 

Gasoline supply tends to have high elasticity as marginal cost is small for changes in quantity, |e|> 1 or e > 1.   Small changes in market allow for large changes in the quanity produced and supplied.

So, for gasoline, the demand curve is near horizontal, with 0> e_d > -1,  while the supply curve is near vertical,  with  e_s > 1.

The elasticity of one curve affects the shift of the other. 

For gasoline, it takes a larger change in market price to induce small changes in supply output. 

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