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1、Chapter 10Market Power:Market Power:Monopoly and Monopoly and MonopsonyMonopsony1Chapter 1Topics to be DiscussednMonopolynMonopoly PowernSources of Monopoly PowernThe Social Costs of Monopoly Power2Chapter 1Topics to be DiscussednMonopsonynMonopsony PowernLimiting Market Power:The Antitrust Laws3Cha
2、pter 1Perfect CompetitionnReview of Perfect CompetitionlP=LMC=LRAClNormal profits or zero economic profits in the long runlLarge number of buyers and sellerslHomogenous productlPerfect informationlFirm is a price taker4Chapter 1Perfect CompetitionQQPPMarketIndividual FirmDSQ0P0P0D=MR=Pq0LRACLMC5Chap
3、ter 1MonopolynMonopoly1)One seller-many buyers2)One product(no good substitutes)3)Barriers to entry6Chapter 1MonopolynThe monopolist is the supply-side of the market and has complete control over the amount offered for sale.nProfits will be maximized at the level of output where marginal revenue equ
4、als marginal cost.7Chapter 1MonopolynFinding Marginal RevenuelAs the sole producer,the monopolist works with the market demand to determine output and price.lAssume a firm with demand:uP=6-Q8Chapter 1Total,Marginal,and Average Revenue$60$0-515$5$54283433913248-12155-31TotalMarginalAveragePriceQuanti
5、tyRevenueRevenueRevenuePQRMRAR9Chapter 1Average and Marginal RevenueOutput0123$perunit ofoutput12345674567Average Revenue(Demand)MarginalRevenue10Chapter 1MonopolynObservations1)To increase sales the price must fall2)MR MC).nAt output levels above MR=MC the increase in cost is greater than the decre
6、ase in revenue(MR MClPerfect CompetitionP=MC29Chapter 1MonopolynMonopoly pricing compared to perfect competition pricing:lThe more elastic the demand the closer price is to marginal cost.lIf Ed is a large negative number,price is close to marginal cost and vice versa.30Chapter 1Astra-Merck Prices Pr
7、ilosecn1995lPrice of Prilosec=$3.50/daily doselPrice of Tagamet and Zantac=$1.50-$2.25/daily doselMC of Prolosec=30-40 cents/daily doseThe Monopolists Output Decision31Chapter 1Astra-Merck Prices PrilosecThe Monopolists Output DecisionPrice of$3.50 is consistent with “the rule of thumb pricing”32Cha
8、pter 1MonopolynShifts in DemandlIn perfect competition,the market supply curve is determined by marginal cost.lFor a monopoly,output is determined by marginal cost and the shape of the demand curve.33Chapter 1D2MR2D1MR1Shift in Demand Leads toChange in Price but Same OutputQuantityMC$/QP2P1Q1=Q234Ch
9、apter 1D1MR1Shift in Demand Leads toChange in Output but Same PriceMC$/QMR2D2P1=P2Q1Q2Quantity35Chapter 1MonopolynObservationslShifts in demand usually cause a change in both price and quantity.lA monopolistic market has no supply curve.36Chapter 1MonopolynObservationslMonopolist may supply many dif
10、ferent quantities at the same price.lMonopolist may supply the same quantity at different prices.37Chapter 1MonopolynThe Effect of a TaxlUnder monopoly price can sometimes rise by more than the amount of the tax.nTo determine the impact of a tax:lt=specific taxlMC=MC+tlMR=MC+t:optimal production dec
11、ision38Chapter 1Effect of Excise Tax on MonopolistQuantity$/QMCD=ARMRQ0P0MC+taxtQ1P1Increase in P:P0P1 increase in tax39Chapter 1nQuestionlSuppose:Ed=-2lHow much would the price change?Effect of Excise Tax on Monopolist40Chapter 1nAnswernWhat would happen to profits?Effect of Excise Tax on Monopolis
12、t41Chapter 1MonopolynThe Multiplant FirmlFor many firms,production takes place in two or more different plants whose operating cost can differ.42Chapter 1MonopolynThe Multiplant FirmlChoosing total output and the output for each plant:uThe marginal cost in each plant should be equal.uThe marginal co
13、st should equal the marginal revenue for each plant.43Chapter 1MonopolynAlgebraically:The Multiplant Firm44Chapter 1MonopolynAlgebraically:The Multiplant Firm45Chapter 1MonopolynAlgebraically:The Multiplant Firm46Chapter 1MonopolynAlgebraically:47Chapter 1Production with Two PlantsQuantity$/QD=ARMRM
14、C1MC2MCTMR*Q1Q2Q3P*48Chapter 1Production with Two PlantsnObservations:1)MCT=MC1+MC22)Profit maximizing output:uMCT=MR at QT and P*uMR=MR*uMR*=MC1 at Q1,MC*=MC2 at Q2uMC1+MC2=MCT,Q1+Q2=QT,and MR=MC1+MC2 Quantity$/QD=ARMRMC1MC2MCTMR*Q1Q2Q3P*49Chapter 1Monopoly PowernMonopoly is rare.nHowever,a market
15、with several firms,each facing a downward sloping demand curve will produce so that price exceeds marginal cost.50Chapter 1Monopoly PowernScenario:lFour firms with equal share(5,000)of a market for 20,000 toothbrushes at a price of$1.50.51Chapter 1Quantity10,0002.00QA$/Q$/Q1.501.0020,00030,0003,0005
16、,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.52Chapter 1At a market priceof$1.50,elasticity ofdemand is-1.5.Quantity10,0002.00QA$/Q
17、$/Q1.501.0020,00030,0003,0005,0007,0002.001.501.001.401.60DAMRAMarket DemandFirm A sees a much more elastic demand curve due tocompetition-Ed=-.6.StillFirm A has some monopoly power and charges a pricewhich exceeds MC.MCAThe Demand for Toothbrushes53Chapter 1Monopoly PowernMeasuring Monopoly PowerlI
18、n perfect competition:P=MR=MClMonopoly power:P MC54Chapter 1Monopoly PowernLerners Index of Monopoly PowerlL=(P-MC)/PuThe larger the value of L(between 0 and 1)the greater the monopoly power.lL is expressed in terms of EduL=(P-MC)/P=-1/EduEd is elasticity of demand for a firm,not the market55Chapter
19、 1Monopoly PowernMonopoly power does not guarantee profits.nProfit depends on average cost relative to price.nQuestion:lCan you identify any difficulties in using the Lerner Index(L)for public policy?56Chapter 1Monopoly PowernThe Rule of Thumb for PricinglPricing for any firm with monopoly power uIf
20、 Ed is large,markup is smalluIf Ed is small,markup is large57Chapter 1Elasticity of Demand and Price Markup$/Q$/QQuantityQuantityARMRMRARMCMCQ*Q*P*P*P*-MCThe more elastic isdemand,the less themarkup.58Chapter 1Markup Pricing:Supermarkets to Designer JeansnSupermarkets59Chapter 1nConvenience StoresMa
21、rkup Pricing:Supermarkets to Designer Jeans60Chapter 1nConvenience stores have more monopoly power.nQuestion:lDo convenience stores have higher profits than supermarkets?Markup Pricing:Supermarkets to Designer JeansConvenience Stores61Chapter 1lDesigner jeansEd =-3 to-4uPrice 33-50%MCuMC=$12-$18/pai
22、ruWholesale price=$18-$27Markup Pricing:Supermarkets to Designer JeansDesigner Jeans62Chapter 1The Pricing ofPrerecorded Videocassettes19851999TitleRetail Price($)TitleRetail Price($)Purple Rain$29.98Austin Powers$10.49Raiders of the Lost Ark24.95A Bugs Life17.99Jane Fonda Workout59.95Theres Somethi
23、ng about Mary13.99The Empire Strikes Back79.98Tae-Bo Workout24.47An Officer and a Gentleman24.95Lethal Weapon 416.99Star Trek:The Motion Picture24.95Men in Black12.99Star Wars39.98Armageddon15.8663Chapter 1nWhat Do You Think?lShould producers lower the price of videocassettes to increase sales and r
24、evenue?The Pricing ofPrerecorded Videocassettes64Chapter 1Sources of Monopoly PowernWhy do some firms have considerable monopoly power,and others have little or none?nA firms monopoly power is determined by the firms elasticity of demand.65Chapter 1Sources of Monopoly PowernThe firms elasticity of d
25、emand is determined by:1)Elasticity of market demand2)Number of firms3)The interaction among firms66Chapter 1The Social Costs of Monopoly PowernMonopoly power results in higher prices and lower quantities.nHowever,does monopoly power make consumers and producers in the aggregate better or worse off?
26、67Chapter 1BALost Consumer SurplusDeadweight LossBecause of the higherprice,consumers loseA+B and producer gains A-C.CDeadweight Loss from Monopoly PowerQuantityARMRMCQCPCPmQm$/Q68Chapter 1nRent SeekinglFirms may spend to gain monopoly poweruLobbyinguAdvertisinguBuilding excess capacityThe Social Co
27、sts of Monopoly Power69Chapter 1nThe incentive to engage in monopoly practices is determined by the profit to be gained.nThe larger the transfer from consumers to the firm,the larger the social cost of monopoly.The Social Costs of Monopoly Power70Chapter 1nExamplel1996 Archer Daniels Midland(ADM)suc
28、cessfully lobbied for regulations requiring ethanol be produced from cornnQuestionlWhy only corn?The Social Costs of Monopoly Power71Chapter 1nPrice RegulationlRecall that in competitive markets,price regulation created a deadweight loss.nQuestion:lWhat about a monopoly?The Social Costs of Monopoly
29、Power72Chapter 1ARMRMCPmQmACP1Q1Marginal 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.I
30、f price is lowered to PC outputincreases to its maximum QC andthere is no deadweight loss.Price Regulation$/QQuantityP2=PCQcP3Q3Q3Any price below P4 resultsin the firm incurring a loss.P473Chapter 1nNatural MonopolylA firm that can produce the entire output of an industry at a cost lower than what i
31、t would be if there were several firms.The Social Costs of Monopoly Power74Chapter 1Regulating the Priceof a Natural Monopoly$/QNatural monopolies occurbecause of extensive economies of scaleQuantity75Chapter 1MCACARMR$/QQuantitySetting the price at Pr yields the largest possibleoutput;excess profit
32、 is zero.QrPrPCQCIf the price were regulate to be PC,the firm would lose moneyand go out of business.PmQmUnregulated,the monopolistwould produce Qm and charge Pm.Regulating the Priceof a Natural Monopoly76Chapter 1nRegulation in PracticelIt is very difficult to estimate the firms cost and demand fun
33、ctions because they change with evolving market conditionsThe Social Costs of Monopoly Power77Chapter 1nRegulation in PracticelAn alternative pricing technique-rate-of-return regulation allows the firms to set a maximum price based on the expected rate or return that the firm will earn.uP=AVC+(D+T+s
34、K)/Q,wherelP=price,AVC=average variable costlD=depreciation,T=taxesls=allowed rate of return,K=firms capital stockThe Social Costs of Monopoly Power78Chapter 1nRegulation in PracticelUsing this technique requires hearings to arrive at the respective figures.lThe hearing process creates a regulatory
35、lag that may benefit producers(1950s&60s)or consumers(1970s&80s).nQuestionlWho is benefiting in the 1990s?The Social Costs of Monopoly Power79Chapter 1MonopsonynA monopsony is a market in which there is a single buyer.nAn oligopsony is a market with only a few buyers.nMonopsony power is the ability
36、of the buyer to affect the price of the good and pay less than the price that would exist in a competitive market.80Chapter 1MonopsonynCompetitive BuyerlPrice takerlP=Marginal expenditure=Average expenditurelD=Marginal value81Chapter 1Competitive BuyerCompared to Competitive SellerQuantityQuantity$/
37、Q$/QAR=MRD=MVME=AEP*Q*ME=MV at Q*ME=P*P*=MVP*Q*MCMR=MCP*=MRP*=MCBuyerSeller82Chapter 1MES=AEThe market supply curve is the monopsonistsaverage expenditure curveMonopsonist BuyerQuantity$/QMVQ*mP*mMonopsonyME P&above SPCQCCompetitiveP=PCQ=Q+C83Chapter 1Monopoly and MonopsonyQuantityARMRMC$/QQCPCMonop
38、olyNote:MR=MC;AR MC;P MCP*Q*84Chapter 1Monopoly and MonopsonyQuantity$/QMVMES=AEQ*P*PCQCMonopsonyNote:ME=MV;ME AE;MV P85Chapter 1Monopoly and MonopsonynMonopolylMR MClQm PCnMonopsonylME PlP MVlQm QClPm PC86Chapter 1Monopsony PowernA few buyers can influence price(e.g.automobile industry).nMonopsony
39、power gives them the ability to pay a price that is less than marginal value.87Chapter 1Monopsony PowernThe degree of monopsony power depends on three similar factors.1)Elasticity of market supplyuThe less elastic the market supply,the greater the monopsony power.88Chapter 1Monopsony PowernThe degre
40、e of monopsony power depends on three similar factors.2)Number of buyersuThe fewer the number of buyers,the less elastic the supply and the greater the monopsony power.89Chapter 1Monopsony PowernThe degree of monopsony power depends on three similar factors.3)Interaction Among BuyersuThe less the bu
41、yers compete,the greater the monopsony power.90Chapter 1MES=AEMES=AEMonopsony Power:Elastic versus Inelastic SupplyQuantityQuantity$/Q$/QMVMVQ*P*MV-P*P*Q*MV-P*91Chapter 1ADeadweight Loss fromMonopsony PowernDetermining the deadweight loss in monopsonylChange in sellers surplus =-A-ClChange in buyers
42、 surplus=A-BlChange in welfare=-A-C+A-B=-C-BlInefficiency occurs because less is purchasedQuantity$/QMVMES=AEQ*P*PCQCBCDeadweight Loss92Chapter 1Monopsony PowernBilateral MonopolylBilateral monopoly is rare,however,markets with a small number of sellers with monopoly power selling to a market with f
43、ew buyers with monopsony power is more common.The Social Costs of Monopsony Power93Chapter 1Monopsony PowernQuestionlIn this case,what is likely to happen to price?The Social Costs of Monopsony Power94Chapter 1Limiting Market Power:The Antitrust LawsnAntitrust Laws:lPromote a competitive economylRul
44、es and regulations designed to promote a competitive economy by:uProhibiting actions that restrain or are likely to restrain competitionuRestricting the forms of market structures that are allowable95Chapter 1nSherman Act(1890)lSection 1uProhibits contracts,combinations,or conspiracies in restraint
45、of tradelExplicit agreement to restrict output or fix priceslImplicit collusion through parallel conductLimiting Market Power:The Antitrust Laws96Chapter 1n1983 lSix companies and six executives indicted for price of copper tubingn1996lArcher Daniels Midland(ADM)pleaded guilty to price fixing for ly
46、sine-three sentenced to prison in 1999Limiting Market Power:The Antitrust LawsExamples of Illegal Combinations97Chapter 1n1999lRoche 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 Illega
47、l Combinations98Chapter 1nSherman Act(1890)lSection 2uMakes it illegal to monopolize or attempt to monopolize a market and prohibits conspiracies that result in monopolization.Limiting Market Power:The Antitrust Laws99Chapter 1nClayton Act(1914)1)Makes it unlawful to require a buyer or lessor not to
48、 buy from a competitor2)Prohibits predatory pricingLimiting Market Power:The Antitrust Laws100Chapter 1nClayton Act(1914)3)Prohibits mergers and acquisitions if they“substantially lessen competition”or“tend to create a monopoly”Limiting Market Power:The Antitrust Laws101Chapter 1nRobinson-Patman Act
49、(1936)lProhibits price discrimination if it is likely to injure the competitionLimiting Market Power:The Antitrust Laws102Chapter 1nFederal Trade Commission Act(1914,amended 1938,1973,1975)1)Created the Federal Trade Commission(FTC)2)Prohibitions against deceptive advertising,labeling,agreements wit
50、h retailer to exclude competing brandsLimiting Market Power:The Antitrust Laws103Chapter 1nAntitrust laws are enforced three ways:1)Antitrust Division of the Department of JusticeuA part of the executive branch-the administration can influence enforcementuFines levied on businesses;fines and impriso