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Essay text:
exploiting the consumer by charging monopoly price, failure to
control production costs and other inefficiencies including lack of innovation)
Always the threat of new entry from new suppliers or new products – this affects
the current behaviour of existing firms (may force them to price more competitively
– less scope for monopoly pricing)
There are barriers to contestability in most markets – but the higher the barriers,
the greater the pricing power in the hands of the incumbent firms because the risks
of “hit and run entry” from new rivals is lower
Price and Cross-price Elasticity of Demand
Elasticity of demand remains a fundamental factor affecting a firm’s pricing power
When demand is price inelastic, the business can raise price without losing a disproportionate level of
demand / sales (see left hand diagram on next page)
When demand is price elastic, the potential to raise price and extract consumer surplus, turning it into
higher producer surplus / profit is much reduced – see the right hand diagram on the next page
Cross price elasticity of demand is linked to this – i...
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