Market Power: Monopoly and Monopsony

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Ckapter (OD Ourket Power: Ovuwpoly uct Ovwpsow 

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لحعجصمح() عا با ‎Vopios‏ *® Oowpol ® Qowpol) Power ® Gourves oP Oowwpoly Power ® Dke Goon Costs ‏خام‎ Ovupoly Power ۱ Cheer 0 Oke S 

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لحعجصمح() عا با ‎Vopios‏ ® Oowpsow ® Qowpsow Power a Licvittoey Docket Power Mhe @Butitcust bows Cheer 0 Oke SD 

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erect Cowprtiica a Review ve PerPent Covwpetiios ‏و‎ 6 =LOC 2 0 ‏تا مر و‎ or ‏جما جملا جا جاصام وه‎ تسم اوه له رنه امه مورا و اس بر © سم تا ‎Parent‏ © © ies isu prive toher Cheer 0 Oke 

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00 @O=OR=0 a 

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Opvupoly ® Oowpoly 0) Ove seller - woop buyers Cheer 0 Oke Oo 

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Opvupoly ® Phe woupolst is the supply-side oP the wourket ced has cowplete poutrol over the oud oPPered Por sue. ® ih its wil be woxtvized at the bevel oP vulput 1 0 6 

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Opvupoly a CPicrcicrey Orgel Revenue © the svle producer, the wounpolist works wi the wourket dewoed to ‏توص‎ Dulput ocd price. تام ار اه ‎penne‏ © ‎*P=9-Q‏ Cheer 0 Oke O 

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Oke SO 0۳۷ 0 0 -0 0 0 0 60 $S 56 qd $0 م $9 OR Porat Daye ‏عمسو«‎ ‎Pre ‏ره‎ Qevewe Qevene Qevene R Tord, Oaryed, ued ‏عمهرو۲) مس‎ © 

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Opvupoly ® Observatives 0) ۱۱ ‏ججدصعصوا‎ sules the price wust Pall 8) 0 9) Covwwpured to perPevt cowpetiivs * Oo choo iu prive to choo soles *DR=P Cheer 0 Olde 0 

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Opvupoly a Ovwwpolst’s Output Ovvisiva (۹ ot the vutput tevel where DR = DC a(Q)=RQ- CQ) Aa /AQ=AR/AQ- AC/AQ=0=MC- MA orMC=MR 

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Ourxjical Oost Vke Ovopolst’s Ouput Oevisiva # ®t vutput levels below DR = OC the devreuse it revedue is yreuter thod the ‏مود‎ it post (DR > MC). ®t cutput levels above OR = OC te iwreue ‏جز‎ post is ~reuter thea the devreuse in revedue (OR < MC) 

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QMurqcd Cost 

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Oke IS 

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Opvupoly The QOvuwpotst’s Ouput QOevisivn Mee eee Demané (Q) =40- Q 710 - 200-400 2 ۸۲ \ ۳0 -40 20 0۳ 

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Opvupoly The QOvuwpotst’s Ouput QOevisivn " Bu Cxarople MR=MCor40- 20=20 0-0 \ Wher@=10, P=30 0۳ 

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Opvupoly Vke Ooupolst’s Ovuput Oevsiva ® Ou Cxanple ‎equal ty worse‏ مهس مروت ری رل و ‎ooo be verted that probit is woxievized ot‏ از ‎vost,‏ ‎P =$90 wrt Q= (0.‏ ‏متام مس با میس ‎Dhis‏ © ‎ ‎ ‎Cheer 0 ۵۷» 0 ‎ ‎ ‎ 

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Cxavple oP ProPit Ouxieetzation © Observatiods Gbpe oP r= slope ov’ ord fey ore pardel of UO vats © Probie ore waxtvized a ID ‏عم‎ ۰ ۵-990, 0 2 0, DR =P x Q = $300 © oC 8909, 0 < 0 DC ( 0 ۶ 00 ۰ ۳۱۶۸0 ۰ 5090 = $900 - 90190 

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© Observaiow ٠ ‏نق‎ - 506, 0 - 00, MC ۶ 00*0 2 0 » Profi = 0 2 0 ۶ 56000 - 50600 2 00 or © Prfi=(P -OC) xQ= ($9 - $49)(A) = 5060 

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Opvupoly =O Que oF Dhowb Por Prictcgy لت سا سلجم با مور بل و ‎revenue should equal warded ost ito a nite pe‏ he ‏بات‎ وه ی لا مایا be dewoustrated usiccy © This cot ‏اد‎ 

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® Rut oP ‏طاری(۳؟‎ Por Pricing AR _A(PQ. ۸0 AQ 2. MR= P+ OF = Pe ‏داد‎ \ 3.E, = 7 fA 1. MR=— AP AQ Obde OF 

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@ Rue oP Thurob Por Prictery 4 Zell Pool =z, ادج ‎MR=‏ .5 رت Cheer 0 Obte OS 

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® Rut oP ‏طاری(۳؟‎ Por Pricing 6.2 is woxivized @OR =OC dala eel OC \ 0 Cheer 0 ‏ی‎ + 5 

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® Rut oP ‏طاری(۳؟‎ Por Pricing 7 - a = the workup per OC usu 0 7۳۷۲۲۲۹ 1۳ ))<-۳0 yr 8. The workup should equ the 

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® Rut oP ‏طاری(۳؟‎ Por Pricing ‎ees‏ یر ‎1+( %,] ‎Assume ‎FE, =-4 Mc=9 ‎9 9 P= Se \ 1+12 ‏پم‎ 75 0۳ ‎Oke CO ‎ 

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Opvupoly ® Oowwpel priviay powpared ty perPert ‏:كأصاسام ما‎ © ‏دمصت(‎ ‏مع‎ < 00 © Perbect Orwpetion ‏دمع‎ 00 Cheer 0 Obte SS 

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Opvupoly ® Dopo) privicy powpuned to perPect Dow petitiog pricing: © Phe wore elosiic the dewued the closer prive is 17 OP Cy is charge weyuive suber, prive is close to Cheer 0 ۵» 0 

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Q®sire-Oerck Prices Privsev The Ovowpotst’s Ouput Devsioa =(99S © Prive vP Privsev = $9.60 /daily dose © Prive oP ‏مور له امین‎ > 9090 - $8.0S Maly dose © DOP Proser = OO - FO ceutshdaly dose 

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Q®sire-Oerck Prices Privsev The QOvuwpotst’s Ouput QOevisivn ‎esos‏ ل ‎lye) 1+]1/- 1‏ ‎MC ‎۳ ‏1و9‎ =$3.89 ‎"Price of 99.60 ts costed wi “Ge ne oP truspb pricy” ‎ ‎Cheer 0 Obte SE ‎ ‎ ‎ 

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Opvupoly " ‏دز حتاو‎ Oewaed 040 ‏خر‎ powpetticd, the warket supply purve ts ‏لول‎ by ‏.أعصت موه‎ © Por a wouwpoly, vutput is detercoiced by warqicral Cheer 0 ‏ی‎ 9 

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GRP tt Oewwend beads i ‏مان‎ ta Price bu Gave Ouput 

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GP ta Oewerrd beads to Change ta Ouput but Gave Price 

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Opvupoly © Observations © Chis fo deword Uudly pouse uo choo tt bots ‎worket kus ow supply purve.‏ اسب ۵ ه ‎Cheer 0 ‏ی‎ SO ‎ 

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Opvupoly © Observations ‎supply woop dPPeredt quantities ut‏ روت بای( و ‎the sucve price.‏ ‎® Oowpolst way supply the suse quoctiy ot ‎Cheer 0 Ore 0 ‎ 

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Opvupoly ‎GPPevt oP o Dox‏ با ا" ‎® Ocder woopoly price con sowetttwes rise by wore tho the aout oP the ten. ‏اه اه او ‎BOD detennive the‏ عو اس = 1 © ؛ + 00 - 0( » توص مصاصس لصم امامو :1+ ‎OR = OC‏ © ‎Cheer 0 Ore 0 ‎ 

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GPPevt oP Caves Tux va Ooupolst eorewe ta P: PoP, > crews to fox Cheer 0 Obte SS 

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GPPect oP ‏عم‎ Tux va Ovupolst 1" Qvuesiod © Oppose: B= -O © Wow work would the price chop? Cheer 0 Obde 0 

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GPPect oP Excise Tux vo Oowpolst © Oaswer ‎Cee‏ كم ‎1 74] If E, =-2- P=2MC If MCincreas¢eMC+ t AP=2(MC+ t) =2MC+ 2t | Pricéncreaséy twicthdax ‎ ‎® Okat would hopped to proPits? ‎Cheer 0 9 0 ‎ 

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Opvupoly # Dke Outiptoct Pir © Por won Firs, prooduoiiva toes place ‏ع با وا‎ wore ‏موم وال‎ whose operat cost oot Per. Cheer 0 Obde PO 

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Opvupoly 2 Phe Outiptoct Pires © Choosicg tot cutput ord the putput Por ‏ام او‎ *Dke wari post to eack phot should be ‏.اوس‎ De ware cost should equdl ‏ارو هذا‎ Cheer 0 Obde PS 

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Opvupoly Phe Oudtpkrt Pie # Okebroicaly: Q&C = Outpu&CostforPlant Q, &C, = Outpu&CostforPlane ۱ TotaDutputQ,=Q+Q Cheer 0 Obde OF 

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Opvupoly The Oubiptact Pircz © Dkebraiccly: a =PQ,- G(Q)- G(Q) An _A(PQ) AG _ ۱ 105 11015 Woe Obde PS 0۳۷ 0 

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Opvupoly © kebruicly: A(PQ)) _ AG _ M. M (MB AQ otMO= ae ee Cheer 0 Obde 0 

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)۳ ‏یل‎ wits Tivo Place ® Obsenintiow: و00 + ,00 =,00@ (0 ‎nh ; 060, 0‏ ه ‏8 لدي د 009 د ,00 ‎٠‏ ‎* OR = OR* ‎* OR* = OO, aQ,, DO* = 00:۵ ‎* 00, + OC, = OC,, Q, + ‏د و©‎ © ‏اعد‎ OR = OC, + OC ‎ ‎ 

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Qvuwpoly Power ® Dow tp re. 8 WLowever, 0 worket with severd ‏اوه رح‎ ‏بجاوو‎ 0 dowvavard slopicy decwoed pure will ۱ Cheer 0 ۵» 0 

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Qvuwpoly Power ® Gceuwd: © Pow Pires with equal share (G,OOO) rh a warket Por CO OOO tovtkbruskes at 0 price oe $a.SO. Cheer 0 Oke 0 

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لعين 56 ‎Pro @‏ مه لس ۳ ,| امه 6 عاسجه سا مج طلحصوط لج عطاك سملم ساسلا ات سا سا نها 10,000 0,000 _ 00,000 6,000 6,000 0 Qo 

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Otowatet pree 

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Qvuwpoly Power a Ovusuricry Ovewpoly ower © 40 perPent cowpe tion: P= DR = OC ‏و‎ Oowpol power: P > DOC Cheer 0 Obde SE 

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Qvuwpoly Power © Lercer’s Iadex oP Ovewpoly Power 0 ن دسم - مرزن0 -م) در» اد ‎Dhe lover the ude‏ © qreuer the wowpuly power. © Lis expressed in terxos oF EC, ob = (P - OCP = -VE, *@, is chsticiy oP dewoed Por ‏امد رمسا ه‎ the Obte SS warket 

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Qvuwpoly Power ® Qowwpol) power des ont ~uorcater proPits. ® rohit depecds vo were vost relative ‏ها‎ ‎price. ® Question: ‎en 1‏ ره حادم جفاطح حص< (را) محلب عورا ‎Cheer 0 Obte SO ‎ 

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Qvuwpoly Power ® Dke Rute oP Mhuvb Por Priciay pos 1+ )1/ B,) © Priviagy Por ‏تا روه‎ wi woorpoly power oP @, te hone, workup ip swell oP @, t@ sal, workup is hore Cheer 0 Ore SP 

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‎Pricey‏ يال ‎Guperworkets to Oeskrer leas‏ ‎® Gupercvorkets ). Geverd Piss SC Giver product 9.E, =- 10Poricdvidudl stores ‎MC _MC 4.P= =1.11(M 1+]1- .۳ 09 tue | 5. Prices set ubout 0 1% above OC. ‎0۳۷ 0 hv 60 ‎ 

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Oekup Privtery: Guwerwveorkets to Oeskrer ews ® Cowrdewe Ores (. Wigher prices thod superwurhke ts CCowrdew o dPPercut ues thew B=) 4.P=—__, a LE =124MO 1+(1/- 5) 08 ۱2 CO%bove OC. Cheer 0 ۵» 0 

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Oekup Privtery: Guwerwveorkets to Oeskrer ews Coweiews Gres ® Cowrviewr stores hove wore woowpoly power. ® Qvestiod: © ‏رون رز‎ stores kave higher proPits tho سب 0 Oke Od 

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Oekup Privtery: Guwerwveorkets to Oeskrer ews QOvskner eae © Opsiqner jeu @, =Owv-€ * Prive 99 - 00960 > OC ۰ )0 < 905 - 96/۲ * Ohvlesule price = $00 - $6 Cheer 0 605-68 

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The Pricey oF Crerevorded Ontevrwsries 999 999 Ve Reta Priee($) Tie Retal Priee($) Pup Rac 899.0 6 Powers 9109 QRukers oF te Lost ۷ ‏وراد س6 © 99ج‎ 02.69 doce Prods Oorkout 698.86 There's Gowethiry ‎Dorp 99‏ مه مع هه ‎The Gupre Gries Bak 2۵,99 Te-Br Onto‏ ‎wee‏ © دمجم 0 اماما 9696 .واه ه لمن ‎@u OP Peer‏ ‎Gta Trek: The Ovtcr Petre SF.OG Deut 0 wee‏ ‎Grr Owe 99.99 @ronekoo 699‏ ‎ 

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۲۷ Prictay oF Crerevorded Onlevrussrties # Oka Ov You Phish? © Should producers bower the price oF Videorusseties tv iwreuse soles ved reve? 

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Gouwrces vP Ovwpoly Power ® Ohy do sow Pirw’s kuwe ooosidercble wouwpoly power, ond others have lithe ‏عه‎ ‎wor? © Birv’s wouwpol) power is detercvived by the ‏تاه نا‎ oP desman. Cheer 0 ‏لب‎ OS 

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Gouwrces vP Ovwpoly Power ‎Dke Pircn’s elasticity oP dewend is detercviced‏ "ا ‎3 ‎©( Chosticity oP worket decocrd 9( Ducober oP Pires ‎Cheer 0 Obte SO ‎ 

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The Goon Cost oP Oowpoly Power ® Qpapol) power resus in higher prices ood lower quantities. © Wowever, does woupol power woke powsuvers un produvers ia the ogres عه ل 0 ‎Cheer‏ 

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0۳ QOeudwerkt boss Prow Ovwpoly Power 

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The Goon Cost oP Oowpoly Power ® Rea Geekery ® Pins wuy sped to yota wouwpoly power * Lobbyicey * ) ‏داك سرد‎ روت مه رمزلان )۰ Cheer 0 Obte OS 

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The Goon Cost oP Oowpoly Power § OD ke ‏مرت 9 مرس‎ i woopoly prociives is detercvived by the probit to be yoiced. 9 ۱۱۱ borer the teaser Proow powanvers tv the Pircy, the larger the sovidl post oP woupoly. Cheer 0 Ode TO 

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The Goon Cost oP Oowpoly Power ® Cxaople © (999 Orcker Duniets Didkrrd (BOO) suocessPully lobbied Por rexpubatives requires ethoaol be produced Pro cord ® Qvestioa © Oky ow ora? Cheer 0 Obde TO 

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The Goon Cost oP Oowpoly Power = Prive Rexptatioc متام ‎Revdl that ia powpetiive warkets, price‏ ه ‎peeded o deadweight Iss.‏ ® Question © Oko bout a wowwpoly? Cheer 0 Oke TO 

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The Goon Cost oP Oowpoly Power ® Datu Ovvwpoly © © Pine thet oom produce the eutire pulpal oP a iedustry ota ost lower thao whet if would be Cheer 0 Otte TH 

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QRexuiatay the Prive pF a Oxturd Opupol $/Q Oxted wowpoles vor berause oF extewsive 70 OP sre 0۳۷ 0 

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OP te pre were rewnkte be Poy te Pro wo bow wry ‏ساسحا ته فت ص جد‎ Goto ke prew ot P ‏ان وتا صما ااي‎ ‏لس سسسم یج‎ y zero. Cheer 0 Ore TO 

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The Goon Cost oP Oowpoly Power | io (Prontice © his very dP Pick to esticvate the ‏له اوه و‎ ‏عمط تمس‎ becouse they chore wil Cheer 0 ۶ 

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The Goon Cost oP Oowpoly Power a Rexptatioa ia Practice ۱ ‏وى سرود جمسر‎ requica dows the ‏منوت و اوه 0 عم‎ proce based va the expected rate or reture that the ٠ ‏مص‎ - 000 + (Dt T + KK, where @Q = prive, BOC = were voricble post © = depreciation, TD = toes 05 = dhawed rote oP return, (C= Fire's cupid stool Cheer 0 ۵ TO 

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The Goon Cost oP Oowpoly Power © Requativg ict Prociice © (stag this techoique ‏موی شمه‎ i onive ut the respective Pigures. © Vhe heuriey provess credies ‏ولو و‎ boy that wo bevwhit produvers (IOGOs & Os) or powers (IO Os & Os). ® Qvesiiva © Oho ip beweP iia tat the (OOOs? Cheer 0 Oke TS 

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و( 80 woupsow is 0 worket ‏و‎ whick there ip ® (uc oltppsoap is 0 worket wi ool o Pew buyers. 1" Qouwpsouy power is the ubtliy oP the buver to uPPent the price oF the yood ood pay bess thoo the price thot would exist ia a pow petiive warhet. Cheer 0 Ore OO 

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و( a Cowper tiie @wer © Prive tober © P = Oarged expeadture = Overage expeodiore © OD = ‏تلم ویو(‎ 9۷» 0 Cheer 0 

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عورف 8) جرمشاو م02 ‎Cowpared to Cowprtive Geller‏ 

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QOpvwpsv«ist @wer gia werne ‏چیه سوه‎ مد © صل 6 ۲ < ۰06 0۳۷ 0 

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Ove: OR = OO; ®R > OO; P < 00 00 Cheer 0 Oe OF 

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0۳۷ 0 

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Qvwpol) onl Oowpsvw *® Oowpoly ® Ovwpsow ‏ه م > جر ه‎ 0 < ‏م ۰ 0 دص ه‎ > 00 ۰0 > 0 GE ser ۰ ۵ < ‏وم‎ 9 >, Cheer 0 Ore OO 

صفحه 87:
QOvwpsvw Power 2 Pew buwers oon ‏ام واه‎ (e-4. wutoeoobile irhusiry). ® Qowpsow power qves thew the ubiliy to pay ut prive thot is less thao wurqicd votue. Cheer 0 Oke OF 

صفحه 88:
QOvwpsvw Power © Dhe deqrer oP wouwpsvw power depeods va three sicvilar Pavtors. 0) Chosticity oP warket supply * The less elastic the warket supply, the ‏او‎ ‎the woupsvuy power. Cheer 0 Okt 66 

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QOvwpsvw Power © Dhe deqrer oP wouwpsvw power depeods va three sicvilar Pavtors. PD ke Pewer the cucvber oF buyers, the less power. Cheer 0 Ore 9 

صفحه 90:
QOvwpsvw Power © Dhe deqrer oP wouwpsvw power depeods va three sicvilar Pavtors. 9) | ‏تسه‎ worry @Ouwers © Dke less the buyers vovwpete, the yreuter the WOW PSUUY POWEr. Cheer 0 ۵» OD 

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Qeudweht boss Prow Ovwpsow Power © Detercvinicy the deudweidht loss ia 2171775174 $/0 ‎seller's‏ و مان و 0 2 صاسه ‎ta buyer's‏ وان و ‎surphs = @-@‏ ‎Chern to welPore =‏ © ‎-P-C+@O-@ ‏ما ین روا و‎ less te purckosed ‎ ‎ ‎ ‎ 

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QOvwpsvw Power Tre Gootd Costs oP Ovwpsow Power © ittterd| Dopo) ۱ is rare, however, warkets wits a sll cucber oP sellers wit wourpoly power selicg io a warket with Pew buyers wily 20775091 Power is wore Doo. و ی 0 ‎Cheer‏ 

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QOvwpsvw Power Tre Gootd Costs oP Ovwpsow Power ® Qcestiva Oo this pase, whet is tkely to ‏و وم‎ Cheer 0 Obde OF 

صفحه 95:
Lieve; Darkest Power: The Oxtiinst baws © Bottrust baws: رت رو و ‎Crowne‏ ه ‎Rules ued nequicions desiqued to prowvte a‏ © خر ری رو ‎or ure likely to‏ و اما وت رما * ‎Restrictiog the Porss oP worket structures that‏ * ‎ae dlowuble‏ Cheer 0 ‏ی‎ 

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Lieve; Darkest Power: The Oxtiinst baws ® Gkherwon Ort )419590( ‏نی و‎ ) ‏ور مس و اه‎ ‏لا ان ات و رت‎ * Explicit cyreewed to restrict vuipul or Pix prices © depict cobusiog through partite! paduct و ی 0 ‎Cheer‏ 

صفحه 97:
Lieve; Darkest Power: The Outinst Laws Cxavples oP Wey Cowbicaicas " 0569 عص”ا ال عورشم و لت و ‎ik‏ © بان وم ‎Prive oF‏ ه99 " © ‏صا وني لجعمصام ( (6000)) لجداك:<ا) جاعنده() عصصطاصر3)‎ price Pixicy Por Isic -- three seuteured to prisvo ۰:99 Cheer 0 Ore O? 

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Lieve; Darkest Power: The Outinst Laws Gxacvples ‏خام‎ Wey Oowbicaticcs "۰ 99 ® Rocke 0.C6., BOGE O.G., Rkowe-Pouteus ond Poked pleaded cn to price Poxtory oP ‏مور‎ -- Piced wore thoo $( ‏.تن‎ Cheer 0 Ore SO 

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Lieve; Darkest Power: The Outinst Laws ‎Gkherwon Ort )419590(‏ ® من ه ‎ie‏ مسحو ‎pa‏ ات راز ز باه ۱ ات و انح ‎thot‏ ره تور ‎ ‎Cheer 0 Obte SO ‎ 

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Lieve; Darkest Power: The Oxtiinst baws # Chyion Ort (IQUE) 0) )1( ‏دجاه‎ it ucla Pul to nequine a buyer vr fessor uot ty buy Prow a vDowpetior Cheer 0 9» 0 

صفحه 101:
Lieve; Darkest Power: The Oxtiinst baws # Chyion Ort (IQUE) 9) Orvhibis weryers ‏“ذا وه مه‎ they “substectcly lessea vowpetiiod” or “teod to oreote a ” Cheer 0 Obl 100 

صفحه 102:
Lieve; Darkest Power: The Outinst Laws © Robicsve-Putrcvaa Bot (999) ® Prvhibis price discriicativa iP itis thely to ‏زو‎ ‎the vowprtiica Cheer 0 Oe IOC 

صفحه 103:
Lieve; Darkest Power: The Oxtiinst baws ® Pederd Trade Cowwissiva Ort (IO0F, uvewed JQ00, IOTS, (OTS) )( Crested the Pederal Trade Oowxvissiva (PTO) ‏رز سول‎ abet, ‏رل‎ ۲1۲۲۲۲۲۲۲ wits retailer to exclude ۲7۲7۲۲7۳۳۲۲ broods Cheer 0 Obl 006 

صفحه 104:
Lieve; Darkest Power: The Oxtiinst baws © Qotterst wus are ‏لوا‎ three ways: )( Buttrust Oivisivg oP the Oepartect oF Justice * 0 pon oP the exeruive broack--the dei ae bh * Pics levied vo busiuesses; Piaes ‏لحه‎ Cheer 0 Obbe IOP 

صفحه 105:
Lieve; Darkest Power: The Oxtiinst baws © Qotterst wus are ‏لوا‎ three ways: ©) Pederd Trade Oowsissiva +) ‏موی ماس ما‎ a ‏مس همست ص امون‎ Cheer 0 2» 

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Chapter 10 Market Power: Monopoly and Monopsony Topics to be Discussed  Monopoly  Monopoly Power  Sources of Monopoly Power  The Social Costs of Monopoly Power Chapter 10 Slide 2 Topics to be Discussed  Monopsony  Monopsony Power  Limiting Market Power: The Antitrust Laws Chapter 10 Slide 3 Perfect Competition  Review of Perfect Competition P = LMC = LRAC  Normal profits or zero economic profits in the long run  Large number of buyers and sellers  Homogenous product  Perfect information  Firm is a price taker Chapter 10 Slide 4 Perfect Competition Market P D P S Individual Firm LMC P0 P0 Q0 Q LRAC D = MR = P q0 Q Monopoly  Monopoly 1) One seller - many buyers 2) One product (no good substitutes) 3) Barriers to entry Chapter 10 Slide 6 Monopoly  The monopolist is the supply-side of the market and has complete control over the amount offered for sale.  Profits will be maximized at the level of output where marginal revenue equals marginal cost. Chapter 10 Slide 7 Monopoly  Finding Marginal Revenue  As the sole producer, the monopolist works with the market demand to determine output and price.  Assume  Chapter 10 a firm with demand: P=6-Q Slide 8 Total, Marginal, and Average Revenue Price Quantity Total Revenue P Q R MR AR $6 5 4 3 2 1 0 1 2 3 4 5 $0 5 8 9 8 5 --$5 3 1 -1 -3 --$5 4 3 2 1 Chapter 10 Marginal Revenue Average Revenue Slide 9 Average and Marginal Revenue $ per unit of output 7 6 5 Average Revenue (Demand) 4 3 2 Chapter 10 1 Marginal Revenue 0 1 2 3 4 5 6 7 Output Slide 10 Monopoly  Observations 1) To increase sales the price must fall 2) MR < P 3) Compared to perfect competition Chapter 10  No change in price to change sales  MR = P Slide 11 Monopoly  Monopolist’s Output Decision 1) Profits maximized at the output level where MR = MC 2) Chapter 10 Cost functions are the same  (Q) R(Q)  C(Q)  / Q R / Q  C / Q 0 MC MR or MCMR Slide 12 Maximizing Profit When Marginal Revenue Equals Marginal Cost The The Monopolist’s Monopolist’s Output Output Decision Decision  At output levels below MR = MC the decrease in revenue is greater than the decrease in cost (MR > MC).  At output levels above MR = MC the increase in cost is greater than the decrease in revenue (MR < MC) Chapter 10 Slide 13 Maximizing Profit When Marginal Revenue Equals Marginal Cost $ per unit of output MC P1 P* AC P2 Lost profit D = AR MR Q1 Chapter 10 Q* Q2 Lost profit Quantity Slide 14 Monopoly The The Monopolist’s Monopolist’s Output Output Decision Decision  An Example 2 CostC(Q) 50 Q C MC 2Q Q Chapter 10 Slide 15 Monopoly The The Monopolist’s Monopolist’s Output Output Decision Decision  An Example DemandP(Q) 40 Q 2 R(Q) P(Q)Q 40Q  Q R MR 40 2Q Q Chapter 10 Slide 16 Monopoly The The Monopolist’s Monopolist’s Output Output Decision Decision  An Example MRMCor 40 2Q 2Q Q 10 WhenQ 10, P 30 Chapter 10 Slide 17 Monopoly The The Monopolist’s Monopolist’s Output Output Decision Decision  An Example  By setting marginal revenue equal to marginal cost, it can be verified that profit is maximized at P = $30 and Q = 10.  This Chapter 10 can be seen graphically: Slide 18 Example of Profit Maximization $ C t' 400 R 300 c’ 200 t Profits 150 100 50 0 Chapter 10 c 5 10 15 20 Quantity Slide 19 Example of Profit Maximization  Observations      Slope of rr’ = slope cc’ and they are parallel at 10 units Profits are maximized at 10 units P = $30, Q = 10, TR = P x Q = $300 AC = $15, Q = 10, TC = AC x Q = 150 Profit = TR - TC  $150 = $300 $150 C $ t' 400 R 300 c 200 t 150 Profits 100 50 c 0 5 10 15 20 Quantity Chapter 10 Slide 20 Example of Profit Maximization $/Q 40 MC 30 AC Profit 20 AR 15 10 MR 0 Chapter 10 5 10 15 20 Quantity Slide 21 Example of Profit Maximization  Observations  AC = $15, Q = 10, TC = AC x Q = 150  Profit = TR = TC = $300 - $150 = $150 or  Profit = (P - AC) x Q = ($30 - $15)(10) = $150 $/Q 40 MC 30 AC Profit 20 AR 15 MR 10 0 5 10 15 20 Quantity Chapter 10 Slide 22 Monopoly  A Rule of Thumb for Pricing  We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice.  This can be demonstrated using the following steps: Chapter 10 Slide 23 A Rule of Thumb for Pricing R  (PQ) 1. MR  Q Q P  Q   P   2. MRP  Q P  P   Q  P   Q   Q     P 3. Ed     P   Q  Chapter 10 Slide 24 A Rule of Thumb for Pricing 1 Q     P 4.      Q E  P  d  1   5. MRP P  Ed  Chapter 10 Slide 25 A Rule of Thumb for Pricing 6.  is maximized @ MR MC  1  1 P  P   ED  ED  MC P 1  1 ED  Chapter 10 Slide 26 A Rule of Thumb for Pricing 7.  1 Ed = the markup over MC as a percentage of price (P-MC)/P 8. The markup should equal the inverse of the elasticity of demand. Chapter 10 Slide 27 A Rule of Thumb for Pricing MC 9. P    1 1   E d  Assume Ed  4 MC9 9 P 1 1  4  Chapter 10  9  $12 .75 Slide 28 Monopoly  Monopoly pricing compared to perfect competition pricing:  Monopoly P > MC  Perfect Competition P = MC Chapter 10 Slide 29 Monopoly  Monopoly pricing compared to perfect competition pricing:  The more elastic the demand the closer price is to marginal cost.  If Ed is a large negative number, price is close to marginal cost and vice versa. Chapter 10 Slide 30 Astra-Merck Prices Prilosec The The Monopolist’s Monopolist’s Output Output Decision Decision  1995 Price Price of Prilosec = $3.50/daily dose of Tagamet and Zantac = - $2.25/daily dose MC Chapter 10 $1.50 of Prolosec = 30 - 40 cents/daily dose Slide 31 Astra-Merck Prices Prilosec The The Monopolist’s Monopolist’s Output Output Decision Decision MC .35 P   1 1 ED  1 1  1.1 MC .35  1  .91 .09 $3.89 •Price of $3.50 is consistent with “the rule of thumb pricing” Chapter 10 Slide 32 Monopoly  Shifts in Demand  In perfect competition, the market supply curve is determined by marginal cost.  For a monopoly, output is determined by marginal cost and the shape of the demand curve. Chapter 10 Slide 33 Shift in Demand Leads to Change in Price but Same Output $/Q MC P1 P2 D2 D1 MR2 MR1 Q1= Q2 Chapter 10 Quantity Slide 34 Shift in Demand Leads to Change in Output but Same Price $/Q MC P1 = P 2 D2 MR2 D1 MR1 Q1 Chapter 10 Q2 Quantity Slide 35 Monopoly  Observations Shifts in demand usually cause a change in both price and quantity. A Chapter 10 monopolistic market has no supply curve. Slide 36 Monopoly  Observations Monopolist may supply many different quantities at the same price. Monopolist may supply the same quantity at different prices. Chapter 10 Slide 37 Monopoly  The Effect of a Tax  Under monopoly price can sometimes rise by more than the amount of the tax.  To determine the impact of a tax: t = specific tax  MC = MC + t  MR = MC + t : optimal production decision Chapter 10 Slide 38 Effect of Excise Tax on Monopolist $/Q Increase in P: P0P1 > increase in tax P1 P P0 MC + tax D = AR MC MR t Q1 Chapter 10 Q0 Quantity Slide 39 Effect of Excise Tax on Monopolist  Question  Suppose:  How Chapter 10 Ed = -2 much would the price change? Slide 40 Effect of Excise Tax on Monopolist  Answer P MC 1  1   Ed  If Ed  2  P 2MC  If MCincreases toMC t P 2(MC t) 2MC 2t Priceincreases by twice thetax. What would happen to profits? Chapter 10 Slide 41 Monopoly  The Multiplant Firm  For many firms, production takes place in two or more different plants whose operating cost can differ. Chapter 10 Slide 42 Monopoly  The Multiplant Firm  Choosing Chapter 10 total output and the output for each plant:  The marginal cost in each plant should be equal.  The marginal cost should equal the marginal revenue for each plant. Slide 43 Monopoly The The Multiplant Multiplant Firm Firm  Algebraically: Q1 &C1  Output & CostforPlant1 Q2 &C2  Output & CostforPlant2 TotalOutput QT Q1  Q2 Chapter 10 Slide 44 Monopoly The The Multiplant Multiplant Firm Firm  Algebraically:  PQT  C1(Q1)  C2(Q2)  (PQT ) C1   0 Q1 Q1 Q1 Chapter 10 Slide 45 Monopoly The The Multiplant Multiplant Firm Firm  Algebraically: (PQT ) C1 (MR)  (MC) 0 Q1 Q1 MRMC1 Chapter 10 Slide 46 Monopoly  Algebraically: MR MC1 MRMC2 MRMC1 MC2 Chapter 10 Slide 47 Production with Two Plants $/Q MC1 MC2 MCT P* D = AR MR* MR Q1 Chapter 10 Q2 Q3 Quantity Slide 48 Production with Two Plants  Observations: 1) MCT = MC1 + MC2 2) Profit maximizing output:  MC T = MR at QT and P *  MR = MR* MR* = MC1 at Q1, MC* = MC2 at Q2 MC1 + MC2 = MCT, Q1 + Q2 = QT, and MR = MC1 + MC2   $/Q MC1 MC P* D = AR MR* MR Q1 Chapter 10 MCT 2 Q2 Q3 Quantity Slide 49 Monopoly Power  Monopoly is rare.  However, a market with several firms, each facing a downward sloping demand curve will produce so that price exceeds marginal cost. Chapter 10 Slide 50 Monopoly Power  Scenario:  Four firms with equal share (5,000) of a market for 20,000 toothbrushes at a price of $1.50. Chapter 10 Slide 51 The Demand for Toothbrushes $/Q $/Q 2.00 At a market price of $1.50, elasticity of demand is -1.5. 2.00 The demand curve for Firm A depends on how much their product differs, and how the firms compete. 1.60 1.50 1.50 1.40 Market Demand 1.00 10,000 1.00 20,000 30,000 Quantity 3,000 5,000 7,000 QA The Demand for Toothbrushes $/Q $/Q 2.00 At a market price of $1.50, elasticity of demand is -1.5. 2.00 1.60 1.50 Firm A sees a much more elastic demand curve due to competition--Ed = -.6. Still Firm A has some monopoly power and charges a price which exceeds MC. MCA 1.50 1.40 DA Market Demand 1.00 10,000 1.00 20,000 30,000 Quantity MRA 3,000 5,000 7,000 QA Monopoly Power  Measuring Monopoly Power  In perfect competition: P = MR = MC  Monopoly Chapter 10 power: P > MC Slide 54 Monopoly Power  Lerner’s Index of Monopoly Power L = (P - MC)/P  L The larger the value of L (between 0 and 1) the greater the monopoly power. is expressed in terms of Ed  L = (P - MC)/P = -1/Ed  Ed is elasticity of demand for a firm, not the market Chapter 10 Slide 55 Monopoly Power  Monopoly power does not guarantee profits.  Profit depends on average cost relative to price.  Question:  Can you identify any difficulties in using the Lerner Index (L) for public policy? Chapter 10 Slide 56 Monopoly Power  The Rule of Thumb for Pricing MC P 1 1 Ed   Pricing Chapter 10 for any firm with monopoly power  If Ed is large, markup is small  If Ed is small, markup is large Slide 57 Elasticity of Demand and Price Markup $/Q $/Q The more elastic is demand, the less the markup. P* MC MC P* AR P*-MC MR AR MR Q* Quantity Q* Quantity Markup Pricing: Supermarkets to Designer Jeans  Supermarkets 1. Several firms 2.Similar product 3.Ed  10for individual MC stores MC 4.P   1.11(MC) 1 1  .1 0.9 5. Prices set about 10- 11% above MC. Chapter 10 Slide 59 Markup Pricing: Supermarkets to Designer Jeans  Convenience Stores 1. Higher prices than supermarke ts 2.Convenienc e differenti ates them 3.Ed  5 MC MC 4.P   1.25(MC) 1 1  5 0.8 5. Prices set about 25%above MC. Chapter 10 Slide 60 Markup Pricing: Supermarkets to Designer Jeans Convenience Convenience Stores Stores  Convenience stores have more monopoly power.  Question:  Do convenience stores have higher profits than supermarkets? Chapter 10 Slide 61 Markup Pricing: Supermarkets to Designer Jeans Designer Designer Jeans Jeans  Designer jeans Ed = -3 to -4 Chapter 10  Price 33 - 50% > MC  MC = $12 - $18/pair  Wholesale price = $18 - $27 Slide 62 The Pricing of Prerecorded Videocassettes 1985 Title 1999 Retail Price($) Title Purple Rain $29.98 Austin Powers Raiders of the Lost Ark 24.95 A Bug’s Life Jane Fonda Workout 59.95 There’s Something about Mary 13.99 The Empire Strikes Back 79.98 Tae-Bo Workout An Officer and a Gentleman 24.95 Lethal Weapon 4 Star Trek: The Motion Picture 24.95 Men in Black Star Wars 39.98 Armageddon Retail Price($) $10.49 17.99 24.47 16.99 12.99 15.86 The Pricing of Prerecorded Videocassettes  What Do You Think? Should producers lower the price of videocassettes to increase sales and revenue? Sources of Monopoly Power  Why do some firm’s have considerable monopoly power, and others have little or none?  A firm’s monopoly power is determined by the firm’s elasticity of demand. Chapter 10 Slide 65 Sources of Monopoly Power  The firm’s elasticity of demand is determined by: 1) Elasticity of market demand 2) Number of firms 3) The interaction among firms Chapter 10 Slide 66 The Social Costs of Monopoly Power  Monopoly power results in higher prices and lower quantities.  However, does monopoly power make consumers and producers in the aggregate better or worse off? Chapter 10 Slide 67 Deadweight Loss from Monopoly Power $/Q Lost Consumer Surplus Deadweight Loss Pm A Because of the higher price, consumers lose A+B and producer gains A-C. MC B C PC AR MR Qm Chapter 10 QC Quantity Slide 68 The Social Costs of Monopoly Power  Rent Seeking  Firms Chapter 10 may spend to gain monopoly power  Lobbying  Advertising  Building excess capacity Slide 69 The Social Costs of Monopoly Power  The incentive to engage in monopoly practices is determined by the profit to be gained.  The larger the transfer from consumers to the firm, the larger the social cost of monopoly. Chapter 10 Slide 70 The Social Costs of Monopoly Power  Example  1996 Archer Daniels Midland (ADM) successfully lobbied for regulations requiring ethanol be produced from corn  Question  Why Chapter 10 only corn? Slide 71 The Social Costs of Monopoly Power  Price Regulation  Recall that in competitive markets, price regulation created a deadweight loss.  Question:  What Chapter 10 about a monopoly? Slide 72 Price Regulation $/Q MR Marginal revenue curve when price is regulated to be no higher that P1. MC Pm P1 P2 = PC AC P3 P4 For output levels above Q1 , Any price below P results If price is lowered to PC output 4 If left alone, a monopolist the original average andoutput inproduces the price firmtoincurring acharges loss. If isits lowered to P 3 and Q and Pm . increases maximum Q m marginal revenue curves Capply. decreases a shortage there is no and deadweight loss.exists. Chapter 10 AR Qm Q1 Q3 Qc Q’3 Quantity Slide 73 The Social Costs of Monopoly Power  Natural Monopoly A firm that can produce the entire output of an industry at a cost lower than what it would be if there were several firms. Chapter 10 Slide 74 Regulating the Price of a Natural Monopoly $/Q Natural monopolies occur because of extensive economies of scale Quantity Chapter 10 Slide 75 Regulating the Price of a Natural Monopoly $/Q Unregulated, the monopolist would produce Qm and charge Pm. If the price were regulate to be PC, the firm would lose money and go out of business. Pm Setting the price at Pr yields the largest possible output;excess profit is zero. AC Pr MC PC AR MR Qm Chapter 10 Qr QC Quantity Slide 76 The Social Costs of Monopoly Power  Regulation in Practice  It is very difficult to estimate the firm's cost and demand functions because they change with evolving market conditions Chapter 10 Slide 77 The Social Costs of Monopoly Power  Regulation in Practice alternative pricing technique---rate-of-return regulation allows the firms to set a maximum price based on the expected rate or return that the firm will earn.  P = AVC + (D + T + sK)/Q, where  An P = price, AVC = average variable cost  D = depreciation, T = taxes  s = allowed rate of return, K = firm’s capital stock Chapter 10 Slide 78 The Social Costs of Monopoly Power  Regulation in Practice  Using this technique requires hearings to arrive at the respective figures.  The hearing process creates a regulatory lag that may benefit producers (1950s & 60s) or consumers (1970s & 80s).  Question  Who Chapter 10 is benefiting in the 1990s? Slide 79 Monopsony  A monopsony is a market in which there is a single buyer.  An oligopsony is a market with only a few buyers.  Monopsony power is the ability of the buyer to affect the price of the good and pay less than the price that would exist in a competitive market. Chapter 10 Slide 80 Monopsony  Competitive Buyer  Price taker P = Marginal expenditure = Average expenditure D = Marginal value Chapter 10 Slide 81 Competitive Buyer Compared to Competitive Seller $/Q Buyer $/Q ME = AE P* ME = MV at Q* ME = P* P* = MV Seller AR = MR P* MR = MC P* = MR P* = MC D = MV Q* Quantity MC Q* Quantity Monopsonist Buyer $/Q The market supply curve is the monopsonist’s average expenditure curve ME Monopsony •ME > P & above S S = AE Competitive •P = PC •Q = Q+C PC P*m MV Q*m Chapter 10 QC Quantity Slide 83 Monopoly and Monopsony $/Q Monopoly Note: MR = MC; AR > MC; P > MC MC P* PC AR MR Q* Chapter 10 QC Quantity Slide 84 Monopoly and Monopsony $/Q ME Monopsony Note: ME = MV; ME > AE; MV > P S = AE PC P* MV Q* Chapter 10 QC Quantity Slide 85 Monopoly and Monopsony  Monopoly  MR P <P  Monopsony  ME >P > MC P Q m < QC Q m < QC P m > PC P m < PC Chapter 10 < MV Slide 86 Monopsony Power  A few buyers can influence price (e.g. automobile industry).  Monopsony power gives them the ability to pay a price that is less than marginal value. Chapter 10 Slide 87 Monopsony Power  The degree of monopsony power depends on three similar factors. 1) Elasticity of market supply  Chapter 10 The less elastic the market supply, the greater the monopsony power. Slide 88 Monopsony Power  The degree of monopsony power depends on three similar factors. 2) Number of buyers  Chapter 10 The fewer the number of buyers, the less elastic the supply and the greater the monopsony power. Slide 89 Monopsony Power  The degree of monopsony power depends on three similar factors. 3) Interaction Among Buyers  Chapter 10 The less the buyers compete, the greater the monopsony power. Slide 90 Monopsony Power: Elastic versus Inelastic Supply ME $/Q $/Q MV - P* MV - P* S = AE ME S = AE P* P* MV Q* Quantity MV Q* Quantity Deadweight Loss from Monopsony Power  Determining the deadweight loss in monopsony   $/Q ME Change in seller’s surplus = -A-C Change in buyer’s surplus = A - B  Change in welfare = -A - C + A - B = -C - B  Inefficiency occurs because less is purchased Deadweight Loss PC P* A B C MV Q* Chapter 10 S = AE QC Quantity Slide 92 Monopsony Power The The Social Social Costs Costs of of Monopsony Monopsony Power Power  Bilateral Monopoly  Bilateral monopoly is rare, however, markets with a small number of sellers with monopoly power selling to a market with few buyers with monopsony power is more common. Chapter 10 Slide 93 Monopsony Power The The Social Social Costs Costs of of Monopsony Monopsony Power Power  Question  In Chapter 10 this case, what is likely to happen to price? Slide 94 Limiting Market Power: The Antitrust Laws  Antitrust Laws:  Promote a competitive economy  Rules and regulations designed to promote a competitive economy by: Chapter 10  Prohibiting actions that restrain or are likely to restrain competition  Restricting the forms of market structures that are allowable Slide 95 Limiting Market Power: The Antitrust Laws  Sherman Act (1890)  Section 1 Prohibits contracts, combinations, or conspiracies in restraint of trade Explicit agreement to restrict output or fix prices Implicit collusion through parallel conduct Chapter 10 Slide 96 Limiting Market Power: The Antitrust Laws Examples Examples of of Illegal Illegal Combinations Combinations  1983 Six companies and six executives indicted for price of copper tubing  1996 Archer Daniels Midland (ADM) pleaded guilty to price fixing for lysine -- three sentenced to prison in 1999 Chapter 10 Slide 97 Limiting Market Power: The Antitrust Laws Examples Examples of of Illegal Illegal Combinations Combinations  1999 Roche A.G., BASF A.G., Rhone-Poulenc and Takeda pleaded guilty to price fixing of vitamins -- fined more than $1 billion. Chapter 10 Slide 98 Limiting Market Power: The Antitrust Laws  Sherman Act (1890)  Section 2 Makes it illegal to monopolize or attempt to monopolize a market and prohibits conspiracies that result in monopolization. Chapter 10 Slide 99 Limiting Market Power: The Antitrust Laws  Clayton Act (1914) 1) Makes it unlawful to require a buyer or lessor not to buy from a competitor 2) Chapter 10 Prohibits predatory pricing Slide 100 Limiting Market Power: The Antitrust Laws  Clayton Act (1914) 3) Prohibits mergers and acquisitions if they “substantially lessen competition” or “tend to create a monopoly” Chapter 10 Slide 101 Limiting Market Power: The Antitrust Laws  Robinson-Patman Act (1936)  Prohibits price discrimination if it is likely to injure the competition Chapter 10 Slide 102 Limiting Market Power: The Antitrust Laws  Federal Trade Commission Act (1914, amended 1938, 1973, 1975) 1) Created the Federal Trade Commission (FTC) 2) Prohibitions against deceptive advertising, labeling, agreements with retailer to exclude competing brands Chapter 10 Slide 103 Limiting Market Power: The Antitrust Laws  Antitrust laws are enforced three ways: 1) Antitrust Division of the Department of Justice Chapter 10  A part of the executive branch--the administration can influence enforcement  Fines levied on businesses; fines and imprisonment levied on individuals Slide 104 Limiting Market Power: The Antitrust Laws  Antitrust laws are enforced three ways: 2) Federal Trade Commission  Chapter 10 Enforces through voluntary understanding or formal commission order Slide 105 Limiting Market Power: The Antitrust Laws  Antitrust laws are enforced three ways: 3) Chapter 10 Private Proceedings  Lawsuits for damages  Plaintiff can receive treble damages Slide 106 Limiting Market Power: The Antitrust Laws  Two Examples American Airlines -- Price fixing Microsoft Chapter 10  Monopoly power  Predatory actions  Collusion Slide 107 Summary  Market power is the ability of sellers or buyers to affect the price of a good.  Market power can be in two forms: monopoly power and monopsony power. Chapter 10 Slide 108 Summary  Monopoly power is determined in part by the number of firms competing in the market.  Monopsony power is determined in part by the number of buyers in the market. Chapter 10 Slide 109 Summary  Market power can impose costs on society.  Sometimes, scale economies make pure monopoly desirable.  We rely on the antitrust laws to prevent firms from obtaining excessive market power. Chapter 10 Slide 110 End of Chapter 10 Market Power: Monopoly and Monopsony