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P&R Chapter 10
Topics to be Discussed
Monopoly and Monopoly Power Sources of Monopoly Power Social Costs of Monopoly Power Monopsony Antitrust Laws
Monopoly
Monopoly
1. 2. 3. 4.
One seller - many buyers One product (no good substitutes) Barriers to entry Price maker
7 6 5 4 3 2 1 0
Marginal Revenue
7 Output
5
MC P1 P* AC P2
Lost profit
D = AR MR Q1 Q* Q2
Lost profit
Quantity
6
40
MC
P=30
Profit
AC AR
20 AC=15 10 MR 0 5 10 15 20
Quantity
7
Monopoly pricing
Monopoly: P > MC P=
MC 1 + (1 Ed )
Monopoly
Monopoly pricing compared to perfect competition pricing:
Perfect Competition P = MC Demand is perfectly elastic, so P=MC
P=
MC 1 + (1 Ed )
Shifts in Demand
In perfect competition, market supply curve determined by marginal cost For monopoly, output determined by marginal cost and shape of demand curve
No supply curve for monopolistic market
10
Effect of Tax
In competitive market, per-unit tax causes price to rise by less than tax
Burden shared by producers and consumers
Under monopoly, price can rise by more than tax amount To determine impact of tax:
t = specific tax MC = MC + t
Amount price increases with tax depends on elasticity of demand Profits for monopolist fall with tax
11
Multi-plant Firm
Firm must determine how to distribute production between plants with different costs
1. 2.
Production should be split so MC in plants is same Output chosen where MR=MC. Profit maximized when MR=MC at each plant. Q1 and C1 is output and cost of production for Plant 1 Q2 and C2 is output and cost of production for Plant 2 QT = Q1 + Q2 is total output Profit is = PQT C1(Q1) C2(Q2)
12
Algebraically:
Multi-plant Firm
Firm should increase output from each plant until additional profit from last unit produced at Plant 1 equals 0 ( PQT ) C1 = =0 Q1 Q1 Q1
MR MC1 = 0 MR = MC1
For Plant 2 MR = MC1 = MC2
13
MC1
MC2 MCT
P*
MR*
D = AR
MR Q1 Q2 QT
Quantity
14
Monopoly Power
Pure monopoly rare Less rare:
Market with several firms, each facing downward sloping demand curve, producing so P>MC
Firms often produce similar goods with some differences that differentiate themselves
15
Market power
-
P MC 1 = P ED (0 L 1) L=
-
In perfect competition: P = MC L = 0 The higher value of L is, the stronger market power a firm can gain Ed is elasticity of demand for a firm, not market
Monopoly Power
Monopoly power does not guarantee profit
Firm may have more monopoly power but lower profits due to high average costs
17
$/Q
P*
MC
P*
P*-MC
D
P*-MC
MR D MR
Q*
Quantity
Q*
Quantity
19
Deadweight Loss
MC
Pm A PC B C AR=D
MR Qm QC
Quantity
20
21
Pm
Pr PC MR
Qm Qr
AC MC AR
QC
Quantity
22
Monopsony
Monopsony: market with single buyer Oligopsony: market with few buyers Monopsony power: ability of buyer to affect price of good and pay less than competitive market price
23
Monopsony
Typically choose to buy until benefit from last unit equals units cost Marginal value: additional benefit derived from purchasing one more unit Marginal expenditure: additional cost of buying one more unit Depends on buying power Competitive Buyer Price taker P = Marginal expenditure = Average expenditure D = Marginal value
24
Buyer
$/Q
Seller
MC
ME = AE
AR = MR
P*
P*
MR = MC P* = MR P* = MC D = MV
ME = MV at Q* ME = P* P* = MV
Q*
Quantity
Q*
Quantity
Monopsonist Buyer
Buyer buys until value from last unit equals expenditure on that unit Market supply curve Shows how much pay per unit as function of total units purchased Supply curve is average expenditure curve Upward sloping supply implies marginal expenditure curve must lie above it Decision to buy extra unit raises price paid for all units
26
Monopsonist Buyer
$/Q
ME
S = AE PC P*m D = MV
Competitive P = PC Q = QC
Q*m
QC
Quantity
27
Monopsony Power
Degree of monopsony power depends on: Number of buyers Fewer number of buyers, less elastic supply and greater monopsony power 2. Interaction among buyers Less buyers compete, greater monopsony power 3. Elasticity of market supply Extent to which price is marked down below MV depends on elasticity of supply If supply is very elastic, markdown small More inelastic supply, more monopsony power
1.
28
Elastic
$/Q
Inelastic ME
MV - P* S = AE
ME P*
S = AE
MV
P* MV
Q*
Quantity
Q*
Quantity
30
ME
Deadweight Loss Consumers gain A-B B
S = AE
C
PC P*
MV
Q*
QC
Quantity
31
Monopsony Power
Bilateral Monopoly
Market with only one buyer and one seller Bilateral monopoly rare Markets with small number of sellers with monopoly power selling to market with few buyers with monopsony power more common Monopsony and monopoly power counteract each other
32
Exercise
A monopolist with 2 plants faces demand curve P=12-0,1Q. Cost function for each plant: ATC1=4+0,1Q1 and ATC2=2+0,1Q2
a. b. c.
Calculate P* and Q* for this monopolist Calculate Q* for each plant Calculate profit for each plant.