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1、Chapter 10Market Power:Monopoly and Monopsony1Chapter 1Topics to be DiscussednMonopolynMonopoly PowernSources of Monopoly PowernThe Social Costs of Monopoly Power2Chapter 1Topics to be DiscussednMonopsonynMonopsony PowernLimiting Market Power: The Antitrust Laws3Chapter 1Perfect CompetitionnReview o
2、f 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 = Pq0LRACLMC5Chapter 1MonopolynMonopoly1) O
3、ne 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 equals marginal cost.7C
4、hapter 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$54283433913248-12155-31TotalMarginalAveragePriceQuantityRevenueReve
5、nueRevenuePQRMRAR9Chapter 1Average and Marginal RevenueOutput0123$ 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 decrease in
6、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 Prilo
7、secn1995lPrice 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 Decision89. 3$09.35.91.11 . 11135.11MCEMCPDPrice of $3.50 is consi
8、stent with “the rule of thumb pricing”32Chapter 1MonopolynShifts in DemandlIn perfect competition, the market supply curve is determined by marginal cost.lFor a monopoly, output is determined by marginal cost and the shape of the demand curve.33Chapter 1D2MR2D1MR1Shift in Demand Leads toChange in Pr
9、ice but Same OutputQuantityMC$/QP2P1Q1= Q234Chapter 1D1MR1Shift in Demand Leads toChange in Output but Same PriceMC$/QMR2D2P1 = P2Q1Q2Quantity35Chapter 1MonopolynObservationslShifts in demand usually cause a change in both price and quantity.lA monopolistic market has no supply curve.36Chapter 1Mono
10、polynObservationslMonopolist may supply many different quantities at the same price.lMonopolist may supply the same quantity at different prices.37Chapter 1MonopolynThe Effect of a TaxlUnder monopoly price can sometimes rise by more than the amount of the tax.nTo determine the impact of a tax:lt = s
11、pecific taxlMC = MC + tlMR = MC + t : optimal production decision38Chapter 1Effect of Excise Tax on MonopolistQuantity$/QMCD = ARMRQ0P0MC + taxtQ1P1PIncrease in P: P0P1 increase in tax39Chapter 1nQuestionlSuppose: Ed = -2lHow much would the price change?Effect of Excise Tax on Monopolist40Chapter 1n
12、AnswernWhat would happen to profits? tax. theby twice increases Price22)(2 toincreases If22If11tMCtMCPtMCMCMCPEEMCPddEffect of Excise Tax on Monopolist41Chapter 1MonopolynThe Multiplant FirmlFor many firms, production takes place in two or more different plants whose operating cost can differ.42Chap
13、ter 1MonopolynThe Multiplant FirmlChoosing total output and the output for each plant:uThe marginal cost in each plant should be equal.uThe marginal cost should equal the marginal revenue for each plant.43Chapter 1MonopolynAlgebraically:212211Output Total2Plant for Cost &Output &1Plant for Cost &Out
14、put &QQQCQCQTThe Multiplant Firm44Chapter 1MonopolynAlgebraically:0)()()(11112211QCQPQQQCQCPQTTThe Multiplant Firm45Chapter 1MonopolynAlgebraically:11110)()()(MCMRQCMCQPQMRTThe Multiplant Firm46Chapter 1MonopolynAlgebraically:2121MCMCMRMCMRMCMR47Chapter 1Production with Two PlantsQuantity$/QD = ARMR
15、MC1MC2MCTMR*Q1Q2Q3P*48Chapter 1Production with Two PlantsnObservations:1)MCT = MC1 + MC22)Profit maximizing output:uMCT = MR at QT and P *uMR = MR*uMR* = MC1 at Q1, MC* = MC2 at Q2uMC1 + MC2 = MCT, Q1 + Q2 = QT, and MR = MC1 + MC2 Quantity$/QD = ARMRMC1MC2MCTMR*Q1Q2Q3P*49Chapter 1Monopoly PowernMono
16、poly is rare.nHowever, a market 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 $1.50.51Chapter 1Quantity10,0002.
17、00QA$/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.52Chapter 1At a market priceof $1.50, elastici
18、ty ofdemand is -1.5.Quantity10,0002.00QA$/Q$/Q1.501.0020,00030,0003,0005,0007,0002.001.501.001.401.60DAMRAMarket DemandFirm A sees a much more elastic demand curve due tocompetition-Ed = -.6. StillFirm A has some monopoly power and charges a pricewhich exceeds MC.MCAThe Demand for Toothbrushes53Chap
19、ter 1Monopoly PowernMeasuring Monopoly PowerlIn perfect competition: P = MR = MClMonopoly power: P MC54Chapter 1Monopoly PowernLerners Index of Monopoly PowerlL = (P - MC)/PuThe larger the value of L (between 0 and 1) the greater the monopoly power.lL is expressed in terms of EduL = (P - MC)/P = -1/
20、EduEd is elasticity of demand for a firm, not the market55Chapter 1Monopoly PowernMonopoly power does not guarantee profits.nProfit depends on average cost relative to price.nQuestion:lCan you identify any difficulties in using the Lerner Index (L) for public policy?56Chapter 1Monopoly PowernThe Rul
21、e of Thumb for PricinglPricing for any firm with monopoly power uIf Ed is large, markup is smalluIf Ed is small, markup is largedEMCP1157Chapter 1Elasticity of Demand and Price Markup$/Q$/QQuantityQuantityARMRMRARMCMCQ*Q*P*P*P*-MCThe more elastic isdemand, the less themarkup.58Chapter 1Markup Pricin
22、g:Supermarkets to Designer JeansnSupermarketsMC. above 11%-10 about set Prices stores individual for 3.product Similar 2.firms Several 1. 5)(11. 19 . 01 .11. 410MCMCMCPEd59Chapter 1nConvenience StoresMC. above 25% about set Prices 3.them atesdifferenti eConvenienc 2.tssupermarke than prices Higher 1
23、. 5)(25. 18 . 0511. 45MCMCMCPEdMarkup 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
24、to -4uPrice 33 - 50% MCuMC = $12 - $18/pairuWholesale price = $18 - $27Markup Pricing:Supermarkets to Designer JeansDesigner Jeans62Chapter 1The Pricing ofPrerecorded Videocassettes19851999TitleRetail Price($)TitleRetail Price($)Purple Rain$29.98Austin Powers$10.49Raiders of the Lost Ark24.95A Bugs
25、Life17.99Jane Fonda Workout59.95Theres Something about Mary13.99The Empire Strikes Back79.98Tae-Bo Workout24.47An Officer and a Gentleman24.95Lethal Weapon 416.99Star Trek: The Motion Picture 24.95Men in Black12.99Star Wars39.98Armageddon15.8663Chapter 1nWhat Do You Think?lShould producers lower the
26、 price of videocassettes to increase sales and revenue?The Pricing ofPrerecorded Videocassettes64Chapter 1Sources of Monopoly PowernWhy do some firms have considerable monopoly power, and others have little or none?nA firms monopoly power is determined by the firms elasticity of demand.65Chapter 1So
27、urces of Monopoly PowernThe firms elasticity of demand is determined by:1) Elasticity of market demand2) Number of firms3) The interaction among firms66Chapter 1The Social Costs of Monopoly PowernMonopoly power results in higher prices and lower quantities.nHowever, does monopoly power make consumer
28、s and producers in the aggregate better or worse off?67Chapter 1BALost Consumer SurplusDeadweight LossBecause of the higherprice, consumers loseA+B and producer gains A-C.CDeadweight Loss from Monopoly PowerQuantityARMRMCQCPCPmQm$/Q68Chapter 1nRent SeekinglFirms may spend to gain monopoly poweruLobb
29、yinguAdvertisinguBuilding excess capacityThe Social Costs 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 Power
30、70Chapter 1nExamplel1996 Archer Daniels Midland (ADM) successfully 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.nQue
31、stion:lWhat about a monopoly?The Social Costs of Monopoly 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 abov
32、e 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$/QQuantityP2 = PCQcP3Q3Q3Any price below P4 resultsin the firm incurring a loss. P473Chapter 1nNatural MonopolylA firm that can prod
33、uce the entire output of an industry at a cost lower than what it would be if there were several firms.The Social Costs of Monopoly Power74Chapter 1Regulating the Priceof a Natural Monopoly$/QNatural monopolies occurbecause of extensive economies of scaleQuantity75Chapter 1MCACARMR$/QQuantitySetting
34、 the price at Pr yields the largest possibleoutput;excess profit is zero.QrPrPCQCIf the price were regulate to be PC,the firm would lose moneyand go out of business.PmQmUnregulated, the monopolistwould produce Qm and charge Pm.Regulating the Priceof a Natural Monopoly76Chapter 1nRegulation in Practi
35、celIt is very difficult to estimate the firms cost and demand functions because they change with evolving market conditionsThe Social Costs of Monopoly Power77Chapter 1nRegulation in PracticelAn alternative pricing technique-rate-of-return regulation allows the firms to set a maximum price based on
36、the expected rate or return that the firm will earn.uP = AVC + (D + T + sK)/Q, wherelP = price, AVC = average variable costlD = depreciation, T = taxesls = allowed rate of return, K = firms capital stockThe Social Costs of Monopoly Power78Chapter 1nRegulation in PracticelUsing this technique require
37、s hearings to arrive at the respective figures.lThe hearing process creates a regulatory lag that may benefit producers (1950s & 60s) or consumers (1970s & 80s).nQuestionlWho is benefiting in the 1990s?The Social Costs of Monopoly Power79Chapter 1MonopsonynA monopsony is a market in which there is a
38、 single buyer.nAn oligopsony is a market with only a few buyers.nMonopsony power is the ability of the buyer to affect the price of the good and pay less than the price that would exist in a competitive market.80Chapter 1MonopsonynCompetitive BuyerlPrice takerlP = Marginal expenditure = Average expe
39、nditurelD = Marginal value81Chapter 1Competitive BuyerCompared to Competitive SellerQuantityQuantity$/Q$/QAR = MRD = MVME = AEP*Q*ME = MV at Q*ME = P*P* = MVP*Q*MCMR = MCP* = MRP* = MCBuyerSeller82Chapter 1MES = AEThe market supply curve is the monopsonistsaverage expenditure curveMonopsonist BuyerQ
40、uantity$/QMVQ*mP*mMonopsonyME P & above SPCQCCompetitiveP = PCQ = Q+C83Chapter 1Monopoly and MonopsonyQuantityARMRMC$/QQCPCMonopolyNote: MR = MC; AR MC; P MCP*Q*84Chapter 1Monopoly and MonopsonyQuantity$/QMVMES = AEQ*P*PCQCMonopsonyNote: ME = MV;ME AE; MV P85Chapter 1Monopoly and MonopsonynMonopolyl
41、MR MClQm PCnMonopsonylME PlP MVlQm QClPm PC86Chapter 1Monopsony PowernA few buyers can influence price (e.g. automobile industry).nMonopsony 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
42、 factors.1) Elasticity of market supplyuThe less elastic the market supply, the greater the monopsony power.88Chapter 1Monopsony PowernThe degree 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 mo
43、nopsony power.89Chapter 1Monopsony PowernThe degree of monopsony power depends on three similar factors.3) Interaction Among BuyersuThe less the buyers compete, the greater the monopsony power.90Chapter 1MES = AEMES = AEMonopsony Power:Elastic versus Inelastic SupplyQuantityQuantity$/Q$/QMVMVQ*P*MV
44、- P*P*Q*MV - P*91Chapter 1ADeadweight Loss fromMonopsony PowernDetermining the deadweight loss in monopsonylChange in sellers surplus = -A-ClChange in buyers surplus = A - BlChange in welfare = -A - C + A - B = -C - BlInefficiency occurs because less is purchasedQuantity$/QMVMES = AEQ*P*PCQCBCDeadwe
45、ight Loss92Chapter 1Monopsony PowernBilateral MonopolylBilateral 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 Power93Chapter 1Monopsony PowernQuestionlIn thi
46、s case, what is likely to happen to price?The Social Costs of Monopsony Power94Chapter 1Limiting Market Power: The Antitrust LawsnAntitrust Laws:lPromote a competitive economylRules and regulations designed to promote a competitive economy by:uProhibiting actions that restrain or are likely to restr
47、ain competitionuRestricting the forms of market structures that are allowable95Chapter 1nSherman Act (1890)lSection 1uProhibits contracts, combinations, or conspiracies in restraint of tradelExplicit agreement to restrict output or fix priceslImplicit collusion through parallel conductLimiting Marke
48、t 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 lysine - three sentenced to prison in 1999Limiting Market Power: The Antitrust LawsExamples of Illegal Combinations97
49、Chapter 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 Illegal Combinations98Chapter 1nSherman Act (1890)lSection 2uMakes it illegal to monopolize or attempt to monopo
50、lize 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 buy from a competitor2) Prohibits predatory pricingLimiting Market Power: The Antitrust Laws100Chapt