Market Power: Monopoly and Monopsony
اسلاید 1: Chapter 10Market Power:Monopoly and Monopsony
اسلاید 2: Chapter 10Slide 2Topics to be DiscussedMonopolyMonopoly PowerSources of Monopoly PowerThe Social Costs of Monopoly Power
اسلاید 3: Chapter 10Slide 3Topics to be DiscussedMonopsonyMonopsony PowerLimiting Market Power: The Antitrust Laws
اسلاید 4: Chapter 10Slide 4Perfect CompetitionReview of Perfect CompetitionP = LMC = LRACNormal profits or zero economic profits in the long runLarge number of buyers and sellersHomogenous productPerfect informationFirm is a price taker
اسلاید 5: Perfect CompetitionQQPPMarketIndividual FirmDSQ0P0P0D = MR = Pq0LRACLMC
اسلاید 6: Chapter 10Slide 6MonopolyMonopoly1) One seller - many buyers2)One product (no good substitutes)3)Barriers to entry
اسلاید 7: Chapter 10Slide 7MonopolyThe 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.
اسلاید 8: Chapter 10Slide 8MonopolyFinding Marginal RevenueAs the sole producer, the monopolist works with the market demand to determine output and price.Assume a firm with demand:P = 6 - Q
اسلاید 9: Chapter 10Slide 9Total, Marginal, and Average Revenue$60$0------515$5$54283433913248-12155-31TotalMarginalAveragePriceQuantityRevenueRevenueRevenuePQRMRAR
اسلاید 10: Chapter 10Slide 10Average and Marginal RevenueOutput0123$ perunit ofoutput12345674567Average Revenue (Demand)MarginalRevenue
اسلاید 11: Chapter 10Slide 11MonopolyObservations1)To increase sales the price must fall2)MR < P3)Compared to perfect competitionNo change in price to change salesMR = P
اسلاید 12: Chapter 10Slide 12MonopolyMonopolist’s Output Decision1)Profits maximized at the output level where MR = MC2)Cost functions are the same
اسلاید 13: Chapter 10Slide 13Maximizing Profit When Marginal Revenue Equals Marginal CostAt 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)The Monopolist’s Output Decision
اسلاید 14: Chapter 10Slide 14LostprofitP1Q1LostprofitMCACQuantity$ perunit ofoutputD = ARMRP*Q*Maximizing Profit When Marginal Revenue Equals Marginal CostP2Q2
اسلاید 15: Chapter 10Slide 15MonopolyAn ExampleThe Monopolist’s Output Decision
اسلاید 16: Chapter 10Slide 16MonopolyAn ExampleThe Monopolist’s Output Decision
اسلاید 17: Chapter 10Slide 17MonopolyAn ExampleThe Monopolist’s Output Decision
اسلاید 18: Chapter 10Slide 18MonopolyAn ExampleBy setting marginal revenue equal to marginal cost, it can be verified that profit is maximized at P = $30 and Q = 10.This can be seen graphically:The Monopolist’s Output Decision
اسلاید 19: Chapter 10Slide 19Quantity$0510152010015020030040050RProfitsttcc’Example of Profit MaximizationC
اسلاید 20: Chapter 10Slide 20Example of Profit MaximizationObservationsSlope of rr’ = slope cc’ and they are parallel at 10 unitsProfits are maximized at 10 unitsP = $30, Q = 10, TR = P x Q = $300AC = $15, Q = 10, TC = AC x Q = 150Profit = TR - TC$150 = $300 - $150Quantity$0510152010015020030040050RCProfitsttcc
اسلاید 21: Chapter 10Slide 21ProfitARMRMCACExample of Profit MaximizationQuantity$/Q051015201020304015
اسلاید 22: Chapter 10Slide 22Example of Profit MaximizationObservationsAC = $15, Q = 10, TC = AC x Q = 150Profit = TR = TC = $300 - $150 = $150 orProfit = (P - AC) x Q = ($30 - $15)(10) = $150Quantity$/Q051015201020304015MCARMRACProfit
اسلاید 23: Chapter 10Slide 23MonopolyA Rule of Thumb for PricingWe 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:
اسلاید 24: Chapter 10Slide 24A Rule of Thumb for Pricing
اسلاید 25: Chapter 10Slide 25A Rule of Thumb for Pricing
اسلاید 26: Chapter 10Slide 26A Rule of Thumb for Pricing
اسلاید 27: Chapter 10Slide 27= the markup over MC as a percentage of price (P-MC)/PA Rule of Thumb for Pricing8. The markup should equal the inverse of the elasticity of demand.
اسلاید 28: Chapter 10Slide 28A Rule of Thumb for Pricing
اسلاید 29: Chapter 10Slide 29MonopolyMonopoly pricing compared to perfect competition pricing:MonopolyP > MCPerfect CompetitionP = MC
اسلاید 30: Chapter 10Slide 30MonopolyMonopoly 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.
اسلاید 31: Chapter 10Slide 31Astra-Merck Prices Prilosec1995Price of Prilosec = $3.50/daily dosePrice of Tagamet and Zantac = $1.50 - $2.25/daily doseMC of Prolosec = 30 - 40 cents/daily doseThe Monopolist’s Output Decision
اسلاید 32: Chapter 10Slide 32Astra-Merck Prices PrilosecThe Monopolist’s Output DecisionPrice of $3.50 is consistent with “the rule of thumb pricing”
اسلاید 33: Chapter 10Slide 33MonopolyShifts in DemandIn perfect competition, the market supply curve is determined by marginal cost.For a monopoly, output is determined by marginal cost and the shape of the demand curve.
اسلاید 34: Chapter 10Slide 34D2MR2D1MR1Shift in Demand Leads to Change in Price but Same OutputQuantityMC$/QP2P1Q1= Q2
اسلاید 35: Chapter 10Slide 35D1MR1Shift in Demand Leads to Change in Output but Same PriceMC$/QMR2D2P1 = P2Q1Q2Quantity
اسلاید 36: Chapter 10Slide 36MonopolyObservationsShifts in demand usually cause a change in both price and quantity.A monopolistic market has no supply curve.
اسلاید 37: Chapter 10Slide 37MonopolyObservationsMonopolist may supply many different quantities at the same price.Monopolist may supply the same quantity at different prices.
اسلاید 38: Chapter 10Slide 38MonopolyThe Effect of a TaxUnder monopoly price can sometimes rise by more than the amount of the tax.To determine the impact of a tax:t = specific taxMC = MC + tMR = MC + t : optimal production decision
اسلاید 39: Chapter 10Slide 39Effect of Excise Tax on MonopolistQuantity$/QMCD = ARMRQ0P0MC + taxtQ1P1Increase in P: P0P1 > increase in tax
اسلاید 40: Chapter 10Slide 40QuestionSuppose: Ed = -2How much would the price change?Effect of Excise Tax on Monopolist
اسلاید 41: Chapter 10Slide 41AnswerWhat would happen to profits?Effect of Excise Tax on Monopolist
اسلاید 42: Chapter 10Slide 42MonopolyThe Multiplant FirmFor many firms, production takes place in two or more different plants whose operating cost can differ.
اسلاید 43: Chapter 10Slide 43MonopolyThe Multiplant FirmChoosing 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.
اسلاید 44: Chapter 10Slide 44MonopolyAlgebraically:The Multiplant Firm
اسلاید 45: Chapter 10Slide 45MonopolyAlgebraically:The Multiplant Firm
اسلاید 46: Chapter 10Slide 46MonopolyAlgebraically:The Multiplant Firm
اسلاید 47: Chapter 10Slide 47MonopolyAlgebraically:
اسلاید 48: Chapter 10Slide 48Production with Two PlantsQuantity$/QD = ARMRMC1MC2MCTMR*Q1Q2Q3P*
اسلاید 49: Chapter 10Slide 49Production with Two PlantsObservations:1)MCT = MC1 + MC22)Profit maximizing output:MCT = MR at QT and P *MR = MR*MR* = MC1 at Q1, MC* = MC2 at Q2MC1 + MC2 = MCT, Q1 + Q2 = QT, and MR = MC1 + MC2 Quantity$/QD = ARMRMC1MC2MCTMR*Q1Q2Q3P*
اسلاید 50: Chapter 10Slide 50Monopoly PowerMonopoly is rare.However, a market with several firms, each facing a downward sloping demand curve will produce so that price exceeds marginal cost.
اسلاید 51: Chapter 10Slide 51Monopoly PowerScenario:Four firms with equal share (5,000) of a market for 20,000 toothbrushes at a price of $1.50.
اسلاید 52: Quantity10,0002.00QA$/Q$/Q1.501.0020,00030,0003,0005,0007,0002.001.501.001.401.60At a market priceof $1.50, elasticity ofdemand is -1.5.Market DemandThe Demand for ToothbrushesThe demand curve for Firm Adepends on how muchtheir product differs, andhow the firms compete.
اسلاید 53: At a market priceof $1.50, elasticity ofdemand is -1.5.Quantity10,0002.00QA$/Q$/Q1.501.0020,00030,0003,0005,0007,0002.001.501.001.401.60DAMRAMarket DemandFirm A sees a much more elastic demand curve due tocompetition--Ed = -.6. StillFirm A has some monopoly power and charges a pricewhich exceeds MC.MCAThe Demand for Toothbrushes
اسلاید 54: Chapter 10Slide 54Monopoly PowerMeasuring Monopoly PowerIn perfect competition: P = MR = MCMonopoly power: P > MC
اسلاید 55: Chapter 10Slide 55Monopoly PowerLerner’s Index of Monopoly PowerL = (P - MC)/PThe larger the value of L (between 0 and 1) the greater the monopoly power.L is expressed in terms of EdL = (P - MC)/P = -1/EdEd is elasticity of demand for a firm, not the market
اسلاید 56: Chapter 10Slide 56Monopoly PowerMonopoly power does not guarantee profits.Profit depends on average cost relative to price.Question:Can you identify any difficulties in using the Lerner Index (L) for public policy?
اسلاید 57: Chapter 10Slide 57Monopoly PowerThe Rule of Thumb for PricingPricing for any firm with monopoly power If Ed is large, markup is smallIf Ed is small, markup is large
اسلاید 58: Elasticity of Demand and Price Markup$/Q$/QQuantityQuantityARMRMRARMCMCQ*Q*P*P*P*-MCThe more elastic isdemand, the less themarkup.
اسلاید 59: Chapter 10Slide 59Markup Pricing: Supermarkets to Designer JeansSupermarkets
اسلاید 60: Chapter 10Slide 60Convenience StoresMarkup Pricing: Supermarkets to Designer Jeans
اسلاید 61: Chapter 10Slide 61Convenience stores have more monopoly power.Question:Do convenience stores have higher profits than supermarkets?Markup Pricing: Supermarkets to Designer JeansConvenience Stores
اسلاید 62: Chapter 10Slide 62Designer jeansEd = -3 to -4Price 33 - 50% > MCMC = $12 - $18/pairWholesale price = $18 - $27Markup Pricing: Supermarkets to Designer JeansDesigner Jeans
اسلاید 63: The Pricing of Prerecorded Videocassettes19851999TitleRetail Price($)TitleRetail Price($)Purple Rain$29.98Austin Powers$10.49Raiders of the Lost Ark24.95A Bug’s Life17.99Jane Fonda Workout59.95There’s Something about Mary13.99The Empire Strikes Back79.98Tae-Bo Workout24.47An Officer and a Gentleman24.95Lethal Weapon 416.99Star Trek: The Motion Picture24.95Men in Black12.99Star Wars39.98Armageddon15.86
اسلاید 64: What Do You Think?Should producers lower the price of videocassettes to increase sales and revenue?The Pricing of Prerecorded Videocassettes
اسلاید 65: Chapter 10Slide 65Sources of Monopoly PowerWhy do some firm’s have considerable monopoly power, and others have little or none?A firm’s monopoly power is determined by the firm’s elasticity of demand.
اسلاید 66: Chapter 10Slide 66Sources of Monopoly PowerThe firm’s elasticity of demand is determined by:1)Elasticity of market demand2)Number of firms3) The interaction among firms
اسلاید 67: Chapter 10Slide 67The Social Costs of Monopoly PowerMonopoly power results in higher prices and lower quantities.However, does monopoly power make consumers and producers in the aggregate better or worse off?
اسلاید 68: Chapter 10Slide 68BALost Consumer SurplusDeadweight LossBecause of the higherprice, consumers loseA+B and producer gains A-C.CDeadweight Loss from Monopoly PowerQuantityARMRMCQCPCPmQm$/Q
اسلاید 69: Chapter 10Slide 69Rent SeekingFirms may spend to gain monopoly powerLobbyingAdvertisingBuilding excess capacityThe Social Costs of Monopoly Power
اسلاید 70: Chapter 10Slide 70The 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.The Social Costs of Monopoly Power
اسلاید 71: Chapter 10Slide 71Example1996 Archer Daniels Midland (ADM) successfully lobbied for regulations requiring ethanol be produced from cornQuestionWhy only corn?The Social Costs of Monopoly Power
اسلاید 72: Chapter 10Slide 72Price RegulationRecall that in competitive markets, price regulation created a deadweight loss.Question:What about a monopoly?The Social Costs of Monopoly Power
اسلاید 73: Chapter 10Slide 73ARMRMCPmQmACP1Q1Marginal revenue curvewhen price is regulatedto be no higher that P1.If left alone, a monopolistproduces Qm and charges Pm.If price is lowered to P3 outputdecreases and a shortage exists. For output levels above Q1 ,the original average andmarginal revenue curves apply.If price is lowered to PC outputincreases to its maximum QC andthere is no deadweight loss.Price Regulation$/QQuantityP2 = PCQcP3Q3Q’3Any price below P4 resultsin the firm incurring a loss. P4
اسلاید 74: Chapter 10Slide 74Natural MonopolyA firm that can produce the entire output of an industry at a cost lower than what it would be if there were several firms.The Social Costs of Monopoly Power
اسلاید 75: Chapter 10Slide 75Regulating the Price of a Natural Monopoly$/QNatural monopolies occurbecause of extensive economies of scaleQuantity
اسلاید 76: Chapter 10Slide 76MCACARMR$/QQuantitySetting the price at Pr yields the largest possibleoutput;excess profit is zero.QrPrPCQCIf the price were regulate to be PC,the firm would lose moneyand go out of business.PmQmUnregulated, the monopolistwould produce Qm and charge Pm.Regulating the Price of a Natural Monopoly
اسلاید 77: Chapter 10Slide 77Regulation in PracticeIt is very difficult to estimate the firms cost and demand functions because they change with evolving market conditionsThe Social Costs of Monopoly Power
اسلاید 78: Chapter 10Slide 78Regulation in PracticeAn alternative pricing technique---rate-of-return regulation allows the firms to set a maximum price based on the expected rate or return that the firm will earn.P = AVC + (D + T + sK)/Q, whereP = price, AVC = average variable costD = depreciation, T = taxess = allowed rate of return, K = firm’s capital stockThe Social Costs of Monopoly Power
اسلاید 79: Chapter 10Slide 79Regulation in PracticeUsing this technique requires hearings to arrive at the respective figures.The hearing process creates a regulatory lag that may benefit producers (1950s & 60s) or consumers (1970s & 80s).QuestionWho is benefiting in the 1990s?The Social Costs of Monopoly Power
اسلاید 80: Chapter 10Slide 80MonopsonyA monopsony is a market in which there is a single buyer.An oligopsony is a market with only a few buyers.Monopsony power is the ability of the buyer to affect the price of the good and pay less than the price that would exist in a competitive market.
اسلاید 81: Chapter 10Slide 81MonopsonyCompetitive BuyerPrice takerP = Marginal expenditure = Average expenditureD = Marginal value
اسلاید 82: Competitive Buyer Compared to Competitive SellerQuantityQuantity$/Q$/QAR = MRD = MVME = AEP*Q*ME = MV at Q*ME = P*P* = MVP*Q*MCMR = MCP* = MRP* = MCBuyerSeller
اسلاید 83: Chapter 10Slide 83MES = AEThe market supply curve is the monopsonist’saverage expenditure curveMonopsonist BuyerQuantity$/QMVQ*mP*mMonopsonyME > P & above SPCQCCompetitiveP = PCQ = Q+C
اسلاید 84: Chapter 10Slide 84Monopoly and MonopsonyQuantityARMRMC$/QQCPCMonopolyNote: MR = MC; AR > MC; P > MCP*Q*
اسلاید 85: Chapter 10Slide 85Monopoly and MonopsonyQuantity$/QMVMES = AEQ*P*PCQCMonopsonyNote: ME = MV;ME > AE; MV > P
اسلاید 86: Chapter 10Slide 86Monopoly and MonopsonyMonopolyMR < PP > MCQm < QCPm > PCMonopsonyME > PP < MVQm < QCPm < PC
اسلاید 87: Chapter 10Slide 87Monopsony PowerA 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.
اسلاید 88: Chapter 10Slide 88Monopsony PowerThe degree of monopsony power depends on three similar factors.1)Elasticity of market supplyThe less elastic the market supply, the greater the monopsony power.
اسلاید 89: Chapter 10Slide 89Monopsony PowerThe degree of monopsony power depends on three similar factors.2)Number of buyersThe fewer the number of buyers, the less elastic the supply and the greater the monopsony power.
اسلاید 90: Chapter 10Slide 90Monopsony PowerThe degree of monopsony power depends on three similar factors.3)Interaction Among BuyersThe less the buyers compete, the greater the monopsony power.
اسلاید 91: MES = AEMES = AEMonopsony Power: Elastic versus Inelastic SupplyQuantityQuantity$/Q$/QMVMVQ*P*MV - P*P*Q*MV - P*
اسلاید 92: Chapter 10Slide 92ADeadweight Loss from Monopsony PowerDetermining the deadweight loss in monopsonyChange in seller’s surplus = -A-CChange in buyer’s surplus = A - BChange in welfare = -A - C + A - B = -C - BInefficiency occurs because less is purchasedQuantity$/QMVMES = AEQ*P*PCQCBCDeadweight Loss
اسلاید 93: Chapter 10Slide 93Monopsony PowerBilateral MonopolyBilateral 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.The Social Costs of Monopsony Power
اسلاید 94: Chapter 10Slide 94Monopsony PowerQuestionIn this case, what is likely to happen to price?The Social Costs of Monopsony Power
اسلاید 95: Chapter 10Slide 95Limiting Market Power: The Antitrust LawsAntitrust Laws:Promote a competitive economyRules and regulations designed to promote a competitive economy by:Prohibiting actions that restrain or are likely to restrain competitionRestricting the forms of market structures that are allowable
اسلاید 96: Chapter 10Slide 96Sherman Act (1890)Section 1Prohibits contracts, combinations, or conspiracies in restraint of tradeExplicit agreement to restrict output or fix pricesImplicit collusion through parallel conductLimiting Market Power: The Antitrust Laws
اسلاید 97: Chapter 10Slide 971983 Six companies and six executives indicted for price of copper tubing1996Archer Daniels Midland (ADM) pleaded guilty to price fixing for lysine -- three sentenced to prison in 1999Limiting Market Power: The Antitrust LawsExamples of Illegal Combinations
اسلاید 98: Chapter 10Slide 981999Roche A.G., BASF A.G., Rhone-Poulenc and Takeda pleaded guilty to price fixing of vitamins -- fined more than $1 billion.Limiting Market Power: The Antitrust LawsExamples of Illegal Combinations
اسلاید 99: Chapter 10Slide 99Sherman Act (1890)Section 2Makes it illegal to monopolize or attempt to monopolize a market and prohibits conspiracies that result in monopolization. Limiting Market Power: The Antitrust Laws
اسلاید 100: Chapter 10Slide 100Clayton Act (1914)1)Makes it unlawful to require a buyer or lessor not to buy from a competitor2)Prohibits predatory pricingLimiting Market Power: The Antitrust Laws
اسلاید 101: Chapter 10Slide 101Clayton Act (1914)3)Prohibits mergers and acquisitions if they “substantially lessen competition” or “tend to create a monopoly”Limiting Market Power: The Antitrust Laws
اسلاید 102: Chapter 10Slide 102Robinson-Patman Act (1936)Prohibits price discrimination if it is likely to injure the competitionLimiting Market Power: The Antitrust Laws
اسلاید 103: Chapter 10Slide 103Federal 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 brandsLimiting Market Power: The Antitrust Laws
اسلاید 104: Chapter 10Slide 104Antitrust laws are enforced three ways:1)Antitrust Division of the Department of JusticeA part of the executive branch--the administration can influence enforcementFines levied on businesses; fines and imprisonment levied on individualsLimiting Market Power: The Antitrust Laws
اسلاید 105: Chapter 10Slide 105Antitrust laws are enforced three ways:2)Federal Trade CommissionEnforces through voluntary understanding or formal commission orderLimiting Market Power: The Antitrust Laws
اسلاید 106: Chapter 10Slide 106Antitrust laws are enforced three ways:3)Private ProceedingsLawsuits for damagesPlaintiff can receive treble damagesLimiting Market Power: The Antitrust Laws
اسلاید 107: Chapter 10Slide 107Two ExamplesAmerican Airlines -- Price fixingMicrosoftMonopoly powerPredatory actionsCollusionLimiting Market Power: The Antitrust Laws
اسلاید 108: Chapter 10Slide 108SummaryMarket 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.
اسلاید 109: Chapter 10Slide 109SummaryMonopoly 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.
اسلاید 110: Chapter 10Slide 110SummaryMarket 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.
اسلاید 111: End of Chapter 10Market Power:Monopoly and Monopsony
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