Notes on Market Power and the Day / Bunn PaperLeigh

Market power refers to the ability of sellers or buyers to exert a perceptible control over market outcomes that enables them to attain higher individual welfare levels than they would achieve under competitive market conditions. In traditional microeconomic analysis, market power is deened in terms of price and quantity decisions. Market power is said to exist when sellers or buyers have power over prices, in the sense that their quantity decisions have a perceptible innuence on the prices that are paid for these quantities Varian (1992, Chapter 14)]. A commonly used proxy for market power is the extent to which the price actually paid for a good or service deviates from the marginal cost of producing that good or service, for price is equal to marginal cost in a competitive market. Market power accruing to sellers is referred to as monopoly power and market power accruing to buyers is referred to as monopsony power. Monopoly power is often illustrated in terms of a single seller facing a downward sloping demand curve, and monopsony power is often illustrated in terms of a single buyer facing an upward sloping supply curve. For example, in labor economic textbooks, monopoly power is typically analyzed in terms of a labor union that faces a downward sloping labor demand curve and engages in collective bargaining with employers to determine wages and employment. Monopsony power is typically analyzed in terms of an employer facing a labor supply curve that slopes upward due to factors such as search costs and the need to pay eeciency wage premiums to elicit and maintain satisfactory eeort levels from individual workers. See, for example, Ehrenberg and Smith (1997). These traditional microeconomic illustrations of market power in terms of single agents optimizing against a xed demand or supply curve are misleading in their simplicity. When markets are more realistically modelled as a network of multiple sellers and buyers interacting strategically over time under possibly asymmetric structural conditions, the complex nature of the relationships linking market structure to market behavior and market power are more clearly revealed. For example, the extent of market power at any given time will now depend on aspects of market structure such as the relative size distributions of sellers and buyers Barla (1998)] as well as on their relative total numbers. In particular, it will depend on how many units 1