1.
Market power is a measure of the ability of a company to successfully influence the pricing of
its products or services
3a i) The four concentration ratio is 0
4.First and foremost the first assumption is that owner is the controller of the firm this is true from
other businesses like small firms however but in other huge firms the owner divorces ownership and
control hence the owners employs managers who run the firm on their behalf Secondly it also assumes
that that the goal of the firm is to maximize profit this is true most firms want to maximise profit but
however not all firms other firms not only want to only maximise profit but also have multitude goals
such as to increase market share n ensuring long term survival that is if industry is competitive The
other assumption is the world is one of certainty. Full knowledge is assumed about the past
performance, the present conditions and the future developments in the environment of the firm. The
firm knows with certainty its own demand and cost functions. It learns from past mistakes, in that its
experience is incorporated into its continuous appraisal (estimation) of its demand and costs. The costs
are U-shaped both in the short and in the long run, implying a single optimum level of output. However
this is unrealistic since the probabilities of future events are subjectively determined. They are
influenced by the time-horizon, the risk attitude and the rate of change of the environment. Thus
businessmen’s expectations cannot come close to objective reality. Different firms will have different
time-horizons, different risk attitude and will form different assessments of uncertain future events.
Consequently firms will respond differently to the same (given) conditions of the environment. The
interactions among uncertainty, risk-aversion and the time-horizon of the entrepreneurs are not dealt
satisfactorily with by the probabilistic approach adopted in the traditional theory of the firm. Another
assumption is The firm acts with a certain time-horizon which depends on various factors, such as the
rate of technological progress, the capital intensity of the methods of production, the nature and
gestation period of the product, etc. The firm aims at the maximization of its profit over this time-
horizon: the goal of the firm is long-run profit maximization. This is attained by maximizing profits in
each one period of the time-horizon of the firm, because the time periods are independent in the sense
that decisions taken in any one period do not affect the behaviour of the firm in other periods. The rule
MC = MR is applied in each period, and profits are maximized with this behaviour both in the short run
and in the long run. However this behavioural rule has been attacked on several grounds. One line of
argument is that although the goal of the firm is long-run profit maximisation, this is not necessarily
attained by equating the short-run marginal cost (SRMC) to the short-run marginal revenue (SRMR).
5. The hold-up problem is a situation where two parties may be able to work most efficiently by
cooperating but refrain from doing so because of concerns that they may give the other party increased
bargaining power and thus reduce their own profits.
Rogerson (1992) showed the existence of a first-best contractual solution to the hold-up problem in
even extremely complex environments with arbitrarily complex transaction decisions and utility
functions. He shows that three important environmental assumptions must be made that is there
should be no externalities so that the investment of each agent directly affects only its own type. Hence
there should be no situation where a seller's investment has influence on the quality of the product that
he sells to the buyer and also there should be risk neutrality and only one investor has partially private
information so that only one agent makes an investment decision. Furthermore, the solution also
requires 'powerful' contracts to be written that is complex contracts can be written ,each party commits
to participate so all parties are willing to sign the contract at the time of signing and the contract
prevents from renegotiating the outcomes of the contract so that renegotiation in equilibrium is not
possible.
According to Rogerson (1992) the hold-up problem does not necessarily create inefficiencies; when it
does, one of the above requirements is not satisfied. The requirements are necessary to come to an
absolutely best solution.
