1、Chapter 10Slide 1Topics to be DiscussedvMonopolyvMonopoly PowervSources of Monopoly PowervThe Social Costs of Monopoly PowerChapter 10Slide 2Topics to be DiscussedvMonopsonyvMonopsony PowervLimiting Market Power:The Antitrust LawsChapter 10Slide 3Perfect CompetitionvReview of Perfect CompetitionP=LM
2、C=LRACNormal profits or zero economic profits in the long runLarge number of buyers and sellersHomogenous productPerfect informationFirm is a price takerPerfect CompetitionQQPPMarketIndividual FirmDSQ0P0P0D=MR=Pq0LRACLMCChapter 10Slide 5MonopolyvMonopoly1)One seller-many buyers2)One product(no good
3、substitutes)3)Barriers to entryChapter 10Slide 6MonopolyvThe monopolist is the supply-side of the market and has complete control over the amount offered for sale.vProfits will be maximized at the level of output where marginal revenue equals marginal cost.Chapter 10Slide 7MonopolyvFinding Marginal
4、RevenueAs the sole producer,the monopolist works with the market demand to determine output and price.Assume a firm with demand:vP=6-QChapter 10Slide 8Total,Marginal,and Average Revenue$60$0-515$5$54283433913248-12155-31TotalMarginalAveragePriceQuantityRevenueRevenueRevenuePQRMRARChapter 10Slide 9Av
5、erage and Marginal RevenueOutput0123$perunit ofoutput12345674567Average Revenue(Demand)MarginalRevenueChapter 10Slide 10MonopolyvObservations1)To increase sales the price must fall2)MR MC).vAt output levels above MR=MC the increase in cost is greater than the decrease in revenue(MR MCPerfect Competi
6、tionP=MCChapter 10Slide 29MonopolyvMonopoly 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 10Slide 30Astra-Merck Prices Prilosecv1995Price of Pril
7、osec=$3.50/daily dosePrice of Tagamet and Zantac=$1.50-$2.25/daily doseMC of Prolosec=30-40 cents/daily doseThe Monopolists Output DecisionChapter 10Slide 31Astra-Merck Prices PrilosecThe Monopolists Output Decision89.3$09.35.91.11.11135.11MCEMCPDPrice of$3.50 is consistent with “the rule of thumb p
8、ricing”Chapter 10Slide 32MonopolyvShifts in DemandIn perfect competition,the market supply curve is determined by marginal cost.For a monopoly,output is determined by marginal cost and the shape of the demand curve.Chapter 10Slide 33D2MR2D1MR1Shift in Demand Leads toChange in Price but Same OutputQu
9、antityMC$/QP2P1Q1=Q2Chapter 10Slide 34D1MR1Shift in Demand Leads toChange in Output but Same PriceMC$/QMR2D2P1=P2Q1Q2QuantityChapter 10Slide 35MonopolyvObservationsShifts in demand usually cause a change in both price and quantity.A monopolistic market has no supply curve.Chapter 10Slide 36Monopolyv
10、ObservationsMonopolist may supply many different quantities at the same price.Monopolist may supply the same quantity at different prices.Chapter 10Slide 37MonopolyvThe Effect of a TaxUnder monopoly price can sometimes rise by more than the amount of the tax.vTo determine the impact of a tax:t=speci
11、fic taxMC=MC+tMR=MC+t:optimal production decisionChapter 10Slide 38Effect of Excise Tax on MonopolistQuantity$/QMCD=ARMRQ0P0MC+taxtQ1P1PIncrease in P:P0P1 increase in taxChapter 10Slide 39vQuestionSuppose:Ed=-2How much would the price change?Effect of Excise Tax on MonopolistChapter 10Slide 40vAnswe
12、rvWhat would happen to profits?tax.theby twice increases Price22)(2 toincreases If22If11tMCtMCPtMCMCMCPEEMCPddEffect of Excise Tax on MonopolistChapter 10Slide 41MonopolyvThe Multiplant FirmFor many firms,production takes place in two or more different plants whose operating cost can differ.Chapter
13、10Slide 42MonopolyvThe Multiplant FirmChoosing total output and the output for each plant:vThe marginal cost in each plant should be equal.vThe marginal cost should equal the marginal revenue for each plant.Chapter 10Slide 43MonopolyvAlgebraically:212211Output Total2Plant for Cost&Output&1Plant for
14、Cost&Output&QQQCQCQTThe Multiplant FirmChapter 10Slide 44MonopolyvAlgebraically:0)()()(11112211QCQPQQQCQCPQTTThe Multiplant FirmChapter 10Slide 45MonopolyvAlgebraically:11110)()()(MCMRQCMCQPQMRTThe Multiplant FirmChapter 10Slide 46MonopolyvAlgebraically:2121MCMCMRMCMRMCMRChapter 10Slide 47Production
15、 with Two PlantsQuantity$/QD=ARMRMC1MC2MCTMR*Q1Q2Q3P*Chapter 10Slide 48Production with Two PlantsvObservations:1)MCT=MC1+MC22)Profit maximizing output:vMCT=MR at QT and P*vMR=MR*vMR*=MC1 at Q1,MC*=MC2 at Q2vMC1+MC2=MCT,Q1+Q2=QT,and MR=MC1+MC2 Quantity$/QD=ARMRMC1MC2MCTMR*Q1Q2Q3P*Chapter 10Slide 49Mo
16、nopoly PowervMonopoly is rare.vHowever,a market with several firms,each facing a downward sloping demand curve will produce so that price exceeds marginal cost.Chapter 10Slide 50Monopoly PowervScenario:Four firms with equal share(5,000)of a market for 20,000 toothbrushes at a price of$1.50.Quantity1
17、0,0002.00QA$/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.At a market priceof$1.50,elasticity ofdeman
18、d is-1.5.Quantity10,0002.00QA$/Q$/Q1.501.0020,00030,0003,0005,0007,0002.001.501.001.401.60DAMRAMarket DemandFirm A sees a much more elastic demand curve due tocompetition-Ed=-.6.StillFirm A has some monopoly power and charges a pricewhich exceeds MC.MCAThe Demand for ToothbrushesChapter 10Slide 53Mo
19、nopoly PowervMeasuring Monopoly PowerIn perfect competition:P=MR=MCMonopoly power:P MCChapter 10Slide 54Monopoly PowervLerners Index of Monopoly PowerL=(P-MC)/PvThe larger the value of L(between 0 and 1)the greater the monopoly power.L is expressed in terms of EdvL=(P-MC)/P=-1/EdvEd is elasticity of
20、 demand for a firm,not the marketChapter 10Slide 55Monopoly PowervMonopoly power does not guarantee profits.vProfit depends on average cost relative to price.vQuestion:Can you identify any difficulties in using the Lerner Index(L)for public policy?Chapter 10Slide 56Monopoly PowervThe Rule of Thumb f
21、or PricingPricing for any firm with monopoly power vIf Ed is large,markup is smallvIf Ed is small,markup is largedEMCP11Elasticity of Demand and Price Markup$/Q$/QQuantityQuantityARMRMRARMCMCQ*Q*P*P*P*-MCThe more elastic isdemand,the less themarkup.Chapter 10Slide 58Markup Pricing:Supermarkets to De
22、signer JeansvSupermarketsMC.above 11%-10 about set Prices stores individual for 3.product Similar 2.firms Several 1.5)(11.19.01.11.410MCMCMCPEdChapter 10Slide 59vConvenience StoresMC.above 25%about set Prices 3.them atesdifferenti eConvenienc 2.tssupermarke than prices Higher 1.5)(25.18.0511.45MCMCM
23、CPEdMarkup Pricing:Supermarkets to Designer JeansChapter 10Slide 60vConvenience stores have more monopoly power.vQuestion:Do convenience stores have higher profits than supermarkets?Markup Pricing:Supermarkets to Designer JeansConvenience StoresChapter 10Slide 61Designer jeansEd =-3 to-4vPrice 33-50
24、%MCvMC=$12-$18/pairvWholesale price=$18-$27Markup Pricing:Supermarkets to Designer JeansDesigner JeansThe Pricing ofPrerecorded Videocassettes19851999TitleRetail Price($)TitleRetail Price($)Purple Rain$29.98Austin Powers$10.49Raiders of the Lost Ark24.95A Bugs Life17.99Jane Fonda Workout59.95Theres
25、Something about Mary13.99The Empire Strikes Back79.98Tae-Bo Workout24.47An Officer and a Gentleman24.95Lethal Weapon 416.99Star Trek:The Motion Picture 24.95Men in Black12.99Star Wars39.98Armageddon15.86vWhat Do You Think?Should producers lower the price of videocassettes to increase sales and reven
26、ue?The Pricing ofPrerecorded VideocassettesChapter 10Slide 64Sources of Monopoly PowervWhy do some firms have considerable monopoly power,and others have little or none?vA firms monopoly power is determined by the firms elasticity of demand.Chapter 10Slide 65Sources of Monopoly PowervThe firms elast
27、icity of demand is determined by:1)Elasticity of market demand2)Number of firms3)The interaction among firmsChapter 10Slide 66The Social Costs of Monopoly PowervMonopoly power results in higher prices and lower quantities.vHowever,does monopoly power make consumers and producers in the aggregate bet
28、ter or worse off?Chapter 10Slide 67BALost Consumer SurplusDeadweight LossBecause of the higherprice,consumers loseA+B and producer gains A-C.CDeadweight Loss from Monopoly PowerQuantityARMRMCQCPCPmQm$/QChapter 10Slide 68vRent SeekingFirms may spend to gain monopoly powervLobbyingvAdvertisingvBuildin
29、g excess capacityThe Social Costs of Monopoly PowerChapter 10Slide 69vThe incentive to engage in monopoly practices is determined by the profit to be gained.vThe larger the transfer from consumers to the firm,the larger the social cost of monopoly.The Social Costs of Monopoly PowerChapter 10Slide 70
30、vExample1996 Archer Daniels Midland(ADM)successfully lobbied for regulations requiring ethanol be produced from cornvQuestionWhy only corn?The Social Costs of Monopoly PowerChapter 10Slide 71vPrice RegulationRecall that in competitive markets,price regulation created a deadweight loss.vQuestion:What
31、 about a monopoly?The Social Costs of Monopoly PowerChapter 10Slide 72ARMRMCPmQmACP1Q1Marginal 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,t
32、he original average andmarginal revenue curves apply.If price is lowered to PC outputincreases to its maximum QC andthere is no deadweight loss.Price Regulation$/QQuantityP2=PCQcP3Q3Q3Any price below P4 resultsin the firm incurring a loss.P4Chapter 10Slide 73vNatural MonopolyA firm that can produce
33、the entire output of an industry at a cost lower than what it would be if there were several firms.The Social Costs of Monopoly PowerChapter 10Slide 74Regulating the Priceof a Natural Monopoly$/QNatural monopolies occurbecause of extensive economies of scaleQuantityChapter 10Slide 75MCACARMR$/QQuant
34、itySetting the price at Pr yields the largest possibleoutput;excess profit is zero.QrPrPCQCIf the price were regulate to be PC,the firm would lose moneyand go out of business.PmQmUnregulated,the monopolistwould produce Qm and charge Pm.Regulating the Priceof a Natural MonopolyChapter 10Slide 76vRegu
35、lation in PracticeIt is very difficult to estimate the firms cost and demand functions because they change with evolving market conditionsThe Social Costs of Monopoly PowerChapter 10Slide 77vRegulation in PracticeAn alternative pricing technique-rate-of-return regulation allows the firms to set a ma
36、ximum price based on the expected rate or return that the firm will earn.vP=AVC+(D+T+sK)/Q,whereP=price,AVC=average variable costD=depreciation,T=taxess=allowed rate of return,K=firms capital stockThe Social Costs of Monopoly PowerChapter 10Slide 78vRegulation in PracticeUsing this technique require
37、s hearings to arrive at the respective figures.The hearing process creates a regulatory lag that may benefit producers(1950s&60s)or consumers(1970s&80s).vQuestionWho is benefiting in the 1990s?The Social Costs of Monopoly PowerChapter 10Slide 79MonopsonyvA monopsony is a market in which there is a s
38、ingle buyer.vAn oligopsony is a market with only a few buyers.vMonopsony power is the ability of the buyer to affect the price of the good and pay less than the price that would exist in a competitive market.Chapter 10Slide 80MonopsonyvCompetitive BuyerPrice takerP=Marginal expenditure=Average expen
39、ditureD=Marginal valueCompetitive BuyerCompared to Competitive SellerQuantityQuantity$/Q$/QAR=MRD=MVME=AEP*Q*ME=MV at Q*ME=P*P*=MVP*Q*MCMR=MCP*=MRP*=MCBuyerSellerChapter 10Slide 82MES=AEThe market supply curve is the monopsonistsaverage expenditure curveMonopsonist BuyerQuantity$/QMVQ*mP*mMonopsonyM
40、E P&above SPCQCCompetitiveP=PCQ=Q+CChapter 10Slide 83Monopoly and MonopsonyQuantityARMRMC$/QQCPCMonopolyNote:MR=MC;AR MC;P MCP*Q*Chapter 10Slide 84Monopoly and MonopsonyQuantity$/QMVMES=AEQ*P*PCQCMonopsonyNote:ME=MV;ME AE;MV PChapter 10Slide 85Monopoly and MonopsonyvMonopolyMR MCQm PCvMonopsonyME PP
41、 MVQm QCPm PCChapter 10Slide 86Monopsony PowervA few buyers can influence price(e.g.automobile industry).vMonopsony power gives them the ability to pay a price that is less than marginal value.Chapter 10Slide 87Monopsony PowervThe degree of monopsony power depends on three similar factors.1)Elastici
42、ty of market supplyvThe less elastic the market supply,the greater the monopsony power.Chapter 10Slide 88Monopsony PowervThe degree of monopsony power depends on three similar factors.2)Number of buyersvThe fewer the number of buyers,the less elastic the supply and the greater the monopsony power.Ch
43、apter 10Slide 89Monopsony PowervThe degree of monopsony power depends on three similar factors.3)Interaction Among BuyersvThe less the buyers compete,the greater the monopsony power.MES=AEMES=AEMonopsony Power:Elastic versus Inelastic SupplyQuantityQuantity$/Q$/QMVMVQ*P*MV-P*P*Q*MV-P*Chapter 10Slide
44、 91ADeadweight Loss fromMonopsony PowervDetermining the deadweight loss in monopsonyChange in sellers surplus =-A-CChange in buyers surplus=A-BChange in welfare=-A-C+A-B=-C-BInefficiency occurs because less is purchasedQuantity$/QMVMES=AEQ*P*PCQCBCDeadweight LossChapter 10Slide 92Monopsony PowervBil
45、ateral 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 PowerChapter 10Slide 93Monopsony PowervQuestionIn this case,what is likely to happen to p
46、rice?The Social Costs of Monopsony PowerChapter 10Slide 94Limiting Market Power:The Antitrust LawsvAntitrust Laws:Promote a competitive economyRules and regulations designed to promote a competitive economy by:vProhibiting actions that restrain or are likely to restrain competitionvRestricting the f
47、orms of market structures that are allowableChapter 10Slide 95vSherman Act(1890)Section 1vProhibits contracts,combinations,or conspiracies in restraint of tradeExplicit agreement to restrict output or fix pricesImplicit collusion through parallel conductLimiting Market Power:The Antitrust LawsChapte
48、r 10Slide 96v1983 Six companies and six executives indicted for price of copper tubingv1996Archer Daniels Midland(ADM)pleaded guilty to price fixing for lysine-three sentenced to prison in 1999Limiting Market Power:The Antitrust LawsExamples of Illegal CombinationsChapter 10Slide 97v1999Roche A.G.,B
49、ASF 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 CombinationsChapter 10Slide 98vSherman Act(1890)Section 2vMakes it illegal to monopolize or attempt to monopolize a market and prohibits
50、conspiracies that result in monopolization.Limiting Market Power:The Antitrust LawsChapter 10Slide 99vClayton 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 LawsChapter 10Slide 100vClayton Act(191
