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Inaugural lecture Marco Haan: Markets, Monopoly and Competition

10 February 2022

Nowadays, the field of Industrial Organization is one of the most interesting, exciting, and relevant fields in economics. Industrial Organization relaxes the assumption that firms lack market power. What if firms do have an influence on market prices, on products that are being offered, perhaps even on the way a market is organized? What happens to market outcomes if there are market frictions, such as search or switching costs? What happens if consumers are not fully rational? Can firms take advantage of that, or will such attempts backfire in a competitive environment? These are all questions Professor Marco Haan considers in his research.

Marco Haan
Marco Haan

A firm that has market power is able to charge a price higher than its marginal cost and hence, to make a profit on its last unit sold. That implies that some consumers will not be able to buy the product, although they are willing to pay more than what its production would cost. The most extreme case of a firm having market power is of course a monopoly. The dominant view nowadays is that being or having a monopoly is not necessarily a problem, but that abusing market power is. Such abuse may involve setting unreasonably high prices, trying to prevent a competitor from doing business, setting unreasonably low prices to try to bankrupt a competitor etcetera.

Changing markets & competition

Over the last decades, markets and competition have changed tremendously. This makes it harder to assess when a firm actually has a monopoly and when exactly it abuses its market power. It all depends on how we define products and markets. As products have become more differentiated, is it harder to define markets. In many markets, the relationship between consumers and firms has changed. Hence, studying markets and competition has become more challenging – and more interesting as well. Rather than just selling stuff, firms sell long-term contracts to provide stuff. Also, firms know much more about consumers, and hence can more closely tailor products and prices to a particular consumer. Furthermore, many successful firms nowadays do not just sell stuff, but rather provide platforms on which other firms can sell or advertise their stuff. All this raises many questions and new challenges for Industrial Organization. It makes it harder to understand how these markets exactly function, and whether we could or should do something to make them function better.

Frictions, platforms & pricing

In these changing markets the general assumption that consumers can effortlessly observe all options and go for the best deal is no longer true, in the real world they face market frictions such as search and switching costs. Switching costs affect the performance of markets. One may argue that they raise prices, as locked-in consumers are unlikely to switch. The platform economy has also raised competition issues, as pricing in these two-sided markets is fundamentally different. By charging a low price to one side, a platform may attract many users there. It then becomes more attractive to the other side, so it can charge a high prices there. All in all, many issues regarding frictions, behavioral consumers and platforms in changing markets still remain to be studied.

Last modified:10 February 2022 2.22 p.m.

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