IO Chapter 1

IO concerns itself primarily with: market power, pricing, advertising, research and development, public policy

Market power is generally linked to pricing, and in turn, to profit. Advertising is a way to establish market power by emphasizing product differentiation, but also of maintaining market power by maintaining share of market. Research and development may also be a way to maintain market power and share. Public policy can both challenge or reinforce market power. Anti-trust legislation may try to limit market power, while copyright and patent laws may actually protect market power.

Why might the government be interested in sometimes maintaining, and in other times squashing market power?

Market power may lead to higher prices and thus to a transfer of money from consumers to producers. This may lead to social welfare loss, as well as economic inefficiency and possibly rent seeking. On the other hand, perhaps market power is more conducive to innovation.