1、Fernando & Yvonn QuijanoPrepared by:Market Power:Monopoly andMonopsony10C H A P T E RCopyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.Chapter 10: Market Power: Monopoly and Monopsony2 of 50Copyright 2009 Pearson Education, Inc. Publishing as Pre
2、ntice Hall Microeconomics Pindyck/Rubinfeld, 7e.CHAPTER 10 OUTLINE10.1 Monopoly10.2 Monopoly Power10.3 Sources of Monopoly Power10.4 The Social Costs of Monopoly Power10.5 Monopsony10.6 Monopsony Power10.7 Limiting Market Power: The Antitrust LawsChapter 10: Market Power: Monopoly and Monopsony3 of
3、50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e. monopoly Market with only one seller. monopsony Market with only one buyer. market power Ability of a seller or buyer to affect the price of a good.Market Power: Monopoly and MonopsonyChapter 1
4、0: Market Power: Monopoly and Monopsony4 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1Average Revenue and Marginal Revenuemarginal revenue Change in revenue resulting from a one-unit increase in output.TABLE 10.1Total, Margi
5、nal, and Average RevenueTotalMarginalAveragePrice (P)Quantity (Q)Revenue (R)Revenue (MR)Revenue (AR)$60$0-515$5$54283433913248-12155-31Chapter 10: Market Power: Monopoly and Monopsony5 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPO
6、LY10.1Average Revenue and Marginal RevenueAverage and marginal revenue are shown for the demand curve P = 6 Q.Average and Marginal RevenueFigure 10.1Chapter 10: Market Power: Monopoly and Monopsony6 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinf
7、eld, 7e.MONOPOLY10.1The Monopolists Output DecisionQ* is the output level at which MR = MC. If the firm produces a smaller outputsay, Q1it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q1 and Q* exceeds the cost of producing them.
8、Similarly, expanding output from Q* to Q2 would reduce profit because the additional cost would exceed the additional revenue.Profit Is Maximized When Marginal Revenue Equals Marginal CostFigure 10.2Chapter 10: Market Power: Monopoly and Monopsony7 of 50Copyright 2009 Pearson Education, Inc. Publish
9、ing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1The Monopolists Output DecisionWe can also see algebraically that Q* maximizes profit. Profit is the difference between revenue and cost, both of which depend on Q:As Q is increased from zero, profit will increase until it reaches
10、 a maximum and then begin to decrease. Thus the profit-maximizing Q is such that the incremental profit resulting from a small increase in Q is just zero (i.e., /Q = 0). ThenBut R/Q is marginal revenue and C/Q is marginal cost. Thus the profit-maximizing condition is that, orChapter 10: Market Power
11、: Monopoly and Monopsony8 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1An ExamplePart (a) shows total revenue R, total cost C, and profit, the difference between the two.Part (b) shows average and marginal revenue and averag
12、e and marginal cost.Marginal revenue is the slope of the total revenue curve, and marginal cost is the slope of the total cost curve.The profit-maximizing output is Q* = 10, the point where marginal revenue equals marginal cost. At this output level, the slope of the profit curve is zero, and the sl
13、opes of the total revenue and total cost curves are equal. The profit per unit is $15, the difference between average revenue and average cost.Because 10 units are produced, total profit is $150.Example of Profit MaximizationFigure 10.3Chapter 10: Market Power: Monopoly and Monopsony9 of 50Copyright
14、 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1A 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.To do this, we fi
15、rst write the expression for marginal revenue:Chapter 10: Market Power: Monopoly and Monopsony10 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1A Rule of Thumb for PricingNote that the extra revenue from an incremental unit of
16、 quantity, (PQ)/Q, has two components:1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P.2. But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price P/Q, which reduces the revenue from all
17、units sold (i.e., a change in revenue QP/Q).Thus,Chapter 10: Market Power: Monopoly and Monopsony11 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1A Rule of Thumb for Pricing(Q/P)(P/Q) is the reciprocal of the elasticity of de
18、mand, 1/Ed, measured at the profit-maximizing output, andNow, because the firms objective is to maximize profit, we can set marginal revenue equal to marginal cost:which can be rearranged to give us(10.1)Equivalently, we can rearrange this equation to express price directly as a markup over marginal
19、 cost:(10.2)Chapter 10: Market Power: Monopoly and Monopsony12 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.In 1995, Prilosec, represented a new generation of antiulcer medication. Prilosec was based on a very different biochemical mech
20、anism and was much more effective than earlier drugs.By 1996, it had become the best-selling drug in the world and faced no major competitor.Astra-Merck was pricing Prilosec at about $3.50 per daily dose.The marginal cost of producing and packaging Prilosec is only about 30 to 40 cents per daily dos
21、e.The price elasticity of demand, ED, should be in the range of roughly 1.0 to 1.2.Setting the price at a markup exceeding 400 percent over marginal cost is consistent with our rule of thumb for pricing.MONOPOLY10.1Chapter 10: Market Power: Monopoly and Monopsony13 of 50Copyright 2009 Pearson Educat
22、ion, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1Shifts in DemandA monopolistic market has no supply curve. The reason is that the monopolists output decision depends not only on marginal cost but also on the shape of the demand curve.Shifts in demand can lead t
23、o changes in price with no change in output, changes in output with no change in price, or changes in both price and output.Chapter 10: Market Power: Monopoly and Monopsony14 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1Shif
24、ts in DemandShifting the demand curve shows that a monopolistic market has no supply curvei.e., there is no one-to-one relationship between price and quantity produced. In (a), the demand curve D1 shifts to new demand curve D2. But the new marginal revenue curve MR2 intersects marginal cost at the s
25、ame point as the old marginal revenue curve MR1. The profit-maximizing output therefore remains the same, although price falls from P1 to P2. In (b), the new marginal revenue curve MR2 intersects marginal cost at a higher output level Q2.But because demand is now more elastic, price remains the same
26、.Shifts in DemandFigure 10.4Chapter 10: Market Power: Monopoly and Monopsony15 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1The Effect of a TaxWith a tax t per unit, the firms effective marginal cost is increased by the amou
27、nt t to MC + t. In this example, the increase in price P is larger than the tax t.Effect of Excise Tax on MonopolistFigure 10.5Suppose a specific tax of t dollars per unit is levied, so that the monopolist must remit t dollars to the government for every unit it sells. If MC was the firms original m
28、arginal cost, its optimal production decision is now given byChapter 10: Market Power: Monopoly and Monopsony16 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1*The Multiplant FirmSuppose a firm has two plants. What should its
29、total output be, and how much of that output should each plant produce? We can find the answer intuitively in two steps. Step 1. Whatever the total output, it should be divided between the two plants so that marginal cost is the same in each plant. Otherwise, the firm could reduce its costs and incr
30、ease its profit by reallocating production. Step 2. We know that total output must be such that marginal revenue equals marginal cost. Otherwise, the firm could increase its profit by raising or lowering total output.Chapter 10: Market Power: Monopoly and Monopsony17 of 50Copyright 2009 Pearson Educ
31、ation, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1*The Multiplant FirmWe can also derive this result algebraically. Let Q1 and C1 be the output and cost of production for Plant 1, Q2 and C2 be the output and cost of production for Plant 2, and QT = Q1 + Q2 be t
32、otal output. Then profit isThe firm should increase output from each plant until the incremental profit from the last unit produced is zero. Start by setting incremental profit from output at Plant 1 to zero:Here (PQT)/Q1 is the revenue from producing and selling one more uniti.e., marginal revenue,
33、 MR, for all of the firms output.Chapter 10: Market Power: Monopoly and Monopsony18 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY10.1*The Multiplant FirmThe next term, C1/Q1, is marginal cost at Plant 1, MC1. We thus have MR MC1
34、 = 0, orSimilarly, we can set incremental profit from output at Plant 2 to zero,Putting these relations together, we see that the firm should produce so that(10.3)Chapter 10: Market Power: Monopoly and Monopsony19 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics
35、 Pindyck/Rubinfeld, 7e.MONOPOLY10.1*The Multiplant FirmA firm with two plants maximizes profits by choosing output levels Q1 and Q2 so that marginal revenue MR (which depends on total output) equals marginal costs for each plant, MC1 and MC2.Production with Two PlantsFigure 10.6Chapter 10: Market Po
36、wer: Monopoly and Monopsony20 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2Part (a) shows the market demand for toothbrushes. Part (b) shows the demand for toothbrushes as seen by Firm A.At a market price of $1.50, ela
37、sticity of market demand is 1.5. Firm A, however, sees a much more elastic demand curve DA because of competition from other firms. At a price of $1.50, Firm As demand elasticity is 6. Still, Firm A has some monopoly power: Its profit-maximizing price is $1.50, which exceeds marginal cost.The Demand
38、 for ToothbrushesFigure 10.7Chapter 10: Market Power: Monopoly and Monopsony21 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2Remember the important distinction between a perfectly competitive firm and a firm with monopo
39、ly power: For the competitive firm, price equals marginal cost; for the firm with monopoly power, price exceeds marginal cost.Measuring Monopoly Power Lerner Index of Monopoly Power Measure of monopoly power calculated as excess of price over marginal cost as a fraction of price.Mathematically:This
40、index of monopoly power can also be expressed in terms of the elasticity of demand facing the firm.(10.4)Chapter 10: Market Power: Monopoly and Monopsony22 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2The Rule of Thumb
41、 for PricingThe markup (P MC)/P is equal to minus the inverse of the elasticity of demand facing the firm. If the firms demand is elastic, as in (a), the markup is small and the firm has little monopoly power.The opposite is true if demand is relatively inelastic, as in (b).Elasticity of Demand and
42、Price MarkupFigure 10.8Chapter 10: Market Power: Monopoly and Monopsony23 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2Although the elasticity of market demand for food is small (about 1), no single supermarket can rai
43、se its prices very much without losing customers to other stores.The elasticity of demand for any one supermarket is often as large as 10. We find P = MC/(1 0.1) = MC/(0.9) = (1.11)MC.The manager of a typical supermarket should set prices about 11 percent above marginal cost.Small convenience stores
44、 typically charge higher prices because its customers are generally less price sensitive. Because the elasticity of demand for a convenience store is about 5, the markup equation implies that its prices should be about 25 percent above marginal cost.With designer jeans, demand elasticities in the ra
45、nge of 2 to 3 are typical.This means that price should be 50 to 100 percent higher than marginal cost.Chapter 10: Market Power: Monopoly and Monopsony24 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2TABLE 10.2 Retail Pr
46、ices of VHS and DVDs2007 Title Retail Price DVDPurple Rain$29.88Raiders of the Lost Ark$24.95Jane Fonda Workout$59.95The Empire Strikes Back$79.98An Officer and a Gentleman$24.95Star Trek: The Motion Picture$24.95Star Wars$39.981985 Title Retail Price VHSPirates of the Caribbean$19.99The Da Vinci Co
47、de$19.99Mission: Impossible III$17.99King Kong$19.98Harry Potter and the Goblet of Fire$17.49Ice Age$19.99The Devil Wears Prada$17.99Source (2007): Based on http:/. Suggested retail price.Chapter 10: Market Power: Monopoly and Monopsony25 of 50Copyright 2009 Pearson Education, Inc. Publishing as Pre
48、ntice Hall Microeconomics Pindyck/Rubinfeld, 7e.MONOPOLY POWER10.2Between 1990 and 1998, lower prices induced consumers to buy many more videos.By 2001, sales of DVDs overtook sales of VHS videocassettes. High-definition DVDs were introduced in 2006, and are expected to displace sales of conventiona
49、l DVDs.Video SalesFigure 10.9Chapter 10: Market Power: Monopoly and Monopsony26 of 50Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Microeconomics Pindyck/Rubinfeld, 7e.SOURCES OF MONOPOLY POWER10.3If there is only one firma pure monopolistits demand curve is the market demand cu
50、rve.Because the demand for oil is fairly inelastic (at least in the short run), OPEC could raise oil prices far above marginal production cost during the 1970s and early 1980s.Because the demands for such commodities as coffee, cocoa, tin, and copper are much more elastic, attempts by producers to c
