微观经济学（平狄克、鲁宾费尔德）第六版课后答案--微观经济学英文原版--CH10_PINDYCK.ppt

Chapter 10Market Power: Monopoly and Monopsony©2005 Pearson Education, Inc.Topics to be DiscussedlMonopoly and Monopoly PowerlSources of Monopoly PowerlThe Social Costs of Monopoly PowerlMonopsony and Monopsony PowerlLimiting Market Power: The Antitrust Laws2©2005 Pearson Education, Inc.Review of Perfect CompetitionlP = LMC = LRAClNormal profits or zero economic profits in the long runlLarge number of buyers and sellerslHomogenous productlPerfect informationlFirm is a price taker3©2005 Pearson Education, Inc.Review of Perfect CompetitionQPMarketDSQ0P0QPIndividual FirmP0D = MR = Pq0LRACLMC4©2005 Pearson Education, Inc.MonopolylMonopoly1.One seller - many buyers2.One product (no good substitutes)3.Barriers to entry4.Price Maker5©2005 Pearson Education, Inc.MonopolylThe monopolist is the supply-side of the market and has complete control over the amount offered for salelMonopolist controls price but must consider consumer demandlProfits will be maximized at the level of output where marginal revenue equals marginal cost6©2005 Pearson Education, Inc.Average and Marginal RevenuelThe monopolist’s average revenue, price received per unit sold, is the market demand curvelMonopolist also needs to find marginal revenue, change in revenue resulting from a unit change in output7©2005 Pearson Education, Inc.Average and Marginal RevenuelFinding Marginal RevenuemAs the sole producer, the monopolist works with the market demand to determine output and pricemAn example can be used to show the relationship between average and marginal revenuemAssume a monopolist with demand:P = 6 - Q8©2005 Pearson Education, Inc.Total, Marginal, and Average Revenue9©2005 Pearson Education, Inc.Total, Marginal, and Average RevenuelRevenue is zero when price is $6mNothing is soldlAt lower prices, revenue increases as quantity sold increaseslWhen demand is downward sloping, the price (average revenue) is greater than marginal revenuemFor sales to increase, price must fall10©2005 Pearson Education, Inc.Average and Marginal RevenueOutput12345670123$ perunit ofoutput4567Average Revenue (Demand)MarginalRevenue11©2005 Pearson Education, Inc.MonopolylObservations1.To increase sales the price must fall2.MR < P3.Compared to perfect competitionlNo change in price to change saleslMR = P12©2005 Pearson Education, Inc.Monopolist’s Output Decision1.Profits maximized at the output level where MR = MC2.Cost functions are the same13©2005 Pearson Education, Inc.Monopolist’s Output DecisionlAt output levels below MR = MC, the decrease in revenue is greater than the decrease in cost (MR > MC)lAt output levels above MR = MC, the increase in cost is greater than the decrease in revenue (MR < MC)14©2005 Pearson Education, Inc.LostprofitP1Q1LostprofitMCACQuantity$ perunit ofoutputD = ARMRP*Q*Monopolist’s Output DecisionP2Q215©2005 Pearson Education, Inc.Monopoly: An Example16©2005 Pearson Education, Inc.Monopoly: An Example17©2005 Pearson Education, Inc.Monopoly: An ExamplelBy setting marginal revenue equal to marginal cost, we verified that profit is maximized at P = $30 and Q = 10lThis can be seen graphically by plotting cost, revenue and profitmProfit is initially negative when produce little or no outputmProfit increase and q increase, maximized at Q*=1018©2005 Pearson Education, Inc.Quantity051520$10015020030040050R10Profitsrr'cc’Example of Profit MaximizationCWhen profits are maximized, slope of rr’ and cc’ are equal: MR=MC19©2005 Pearson Education, Inc.ProfitARMRMCACExample of Profit MaximizationQuantity05101520P=30$/Q102040AC=15Profit = (P - AC) x Q = ($30 - $15)(10) = $15020©2005 Pearson Education, Inc.MonopolylA Rule of Thumb for PricingmWe want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practicemLooking at Marginal Revenue we can see that it has two components21©2005 Pearson Education, Inc.A Rule of Thumb for PricinglProducing one more unit brings in revenue (1)(P) = PlWith downward sloping demand, producing and selling one more unit results in small drop in price P/QmReduces revenue from all units sold, change in revenue: Q(P/Q)22©2005 Pearson Education, Inc.A Rule of Thumb for Pricing23©2005 Pearson Education, Inc.A Rule of Thumb for Pricing24©2005 Pearson Education, Inc.A Rule of Thumb for Pricing25©2005 Pearson Education, Inc.A Rule of Thumb for Pricingl(P – MC)/P is the markup over MC as a percentage of pricelThe markup should equal the inverse of the elasticity of demandlPrice is expressed directly as the markup over marginal cost26©2005 Pearson Education, Inc.A Rule of Thumb for Pricing27©2005 Pearson Education, Inc.MonopolylMonopoly pricing compared to perfect competition pricing:mMonopolylP > MClPrice is larger than MC by an amount that depends inversely on the elasticity of demandmPerfect CompetitionlP = MClDemand is perfectly elastic, so P=MC28©2005 Pearson Education, Inc.MonopolylIf demand is very elastic, there is little benefit to being a monopolistlThe larger the elasticity, the closer to a perfectly competitive marketlNotice a monopolist will never produce a quantity in the inelastic portion of demand curvemIn inelastic portion, can increase revenue by decreasing quantity and increasing price29©2005 Pearson Education, Inc.Shifts in DemandlIn perfect competition, the market supply curve is determined by marginal costlFor a monopoly, output is determined by marginal cost and the shape of the demand curvemThere is no supply curve for monopolistic market30©2005 Pearson Education, Inc.Shifts in DemandlShifts in demand do not trace out price and quantity changes corresponding to a supply curvelShifts in demand lead tomChanges in price with no change in outputmChanges in output with no change in pricemChanges in both price and quantity31©2005 Pearson Education, Inc.D2MR2D1MR1Shifts in DemandQuantityMC$/QP2P1Q1= Q2Shift in demand leads to change in price but same quantity32©2005 Pearson Education, Inc.D1MR1Shifts in DemandMC$/QMR2D2P1 = P2Q1Q2QuantityShift in demand leads to change in quantity but same price33©2005 Pearson Education, Inc.MonopolylShifts in demand usually cause a change in both price and quantitylExamples show how monopolistic market differs from perfectly competitive marketlCompetitive market supplies specific quantity at every pricemThis relationship does not exist for a monopolistic market34©2005 Pearson Education, Inc.The Effect of a TaxlIn competitive market, a per-unit tax causes price to rise by less than tax: burden is shared by producers and consumerslUnder monopoly, price can sometimes rise by more than the amount of the taxlTo determine the impact of a tax:mt = specific taxmMC = MC + t35©2005 Pearson Education, Inc.Effect of Excise Tax on MonopolistQuantity$/QMCD = ARMRQ0P0MC + taxtIncrease in P: P0 to P1 > taxQ1P136©2005 Pearson Education, Inc.Effect of Excise Tax on MonopolistlThe amount the price increases with implementation of a tax depends on elasticity of demandlPrice may or may not increase by more than the taxlIn a competitive market, the price cannot increase by more than taxlProfits for monopolist will fall with a tax37©2005 Pearson Education, Inc.The Multi-plant FirmlFor some firms, production takes place in more than one plant, each with different costslFirm must determine how to distribute production between both plants1.Production should be split so that the MC in the plants is the same2.Output is chosen where MR=MC. Profit is therefore maximized when MR=MC at each plant.38©2005 Pearson Education, Inc.The Multi-plant FirmlWe can show this algebraically:mQ1 and C1 is output and cost of production for Plant 1mQ2 and C2 is output and cost of production for Plant 2mQT = Q1 + Q2 is total outputmProfit is then: = PQT – C1(Q1) – C2(Q2)39©2005 Pearson Education, Inc.The Multi-plant FirmlFirm should increase output from each plant until the additional profit from last unit produced at Plant 1 equals 040©2005 Pearson Education, Inc.The Multi-plant FirmlWe can show the same for Plant 2lTherefore, we can see that the firm should choose to produce whereMR = MC1 = MC2lWe can show this graphicallymMR = MCT gives total outputmThis point shows the MR for each firmmWhere MR crosses MC1 and MC2 shows the output for each firm41©2005 Pearson Education, Inc.Production with Two PlantsQuantity$/QD = ARMRMC1MC2MCTMR*Q1Q2QTP*42©2005 Pearson Education, Inc.Monopoly PowerlPure monopoly is rarelHowever, a market with several firms, each facing a downward sloping demand curve, will produce so that price exceeds marginal costlFirms often product similar goods that have some differences, thereby differentiating themselves from other firms43©2005 Pearson Education, Inc.Monopoly Power: ExamplelFour firms share a market for 20,000 toothbrushes at a price of $1.50lProfits maximizing quantity for each firm is where MR – MClIn our example that is 5000 units for Firm A, with a price of $1.50, which is greater than marginal costlAlthough Firm A is not a pure monopolist, they have monopoly power44At a market priceof $1.50, elasticity ofdemand is -1.5.2.00$/Q1.501.00Quantity10,000QA20,00030,0003,0005,0007,000$/Q2.001.501.001.401.60DAMRAMarket DemandFirm A has some monopoly power and charges a price which exceeds MC where MR=MC.MCAThe Demand for Toothbrushes45©2005 Pearson Education, Inc.Measuring Monopoly PowerlOur firm would have more monopoly power, of course, if it could get rid of the other firmsmBut the firm’s monopoly power might still be substantiallHow can we measure monopoly power to compare firms?lWhat are the sources of monopoly power?mWhy do some firms have more than others?46©2005 Pearson Education, Inc.Measuring Monopoly PowerlCould measure monopoly power by the extent to which price is greater than MC for each firmlLerner’s Index of Monopoly PowermL = (P - MC)/PlThe larger the value of L (between 0 and 1) the greater the monopoly powermL is expressed in terms of EdlL = (P - MC)/P = -1/EdlEd is elasticity of demand for a firm, not the market47©2005 Pearson Education, Inc.Monopoly PowerlMonopoly power, however, does not guarantee profitslProfit depends on average cost relative to pricelOne firm may have more monopoly power but lower profits due to high average costs48©2005 Pearson Education, Inc.Rule of Thumb for PricinglPricing for any firm with monopoly power: mIf Ed is large, markup is smallmIf Ed is small, markup is large49Elasticity of Demand and Price MarkupP*MRD$/uantityMCQ*P*-MCThe more elastic isdemand, the less themarkup.DMR$/uantityMCQ*P*P*-MC50©2005 Pearson Education, Inc.Markup Pricing: Supermarkets & Convenience StoreslSupermarkets51©2005 Pearson Education, Inc.Markup Pricing: Supermarkets & Convenience StoreslConvenience Stores52©2005 Pearson Education, Inc.Markup Pricing: Supermarkets & Convenience StoreslConvenience stores have more monopoly powerlConvenience stores do have higher profits than supermarkets, howevermVolume is far smaller and average fixed costs are larger53©2005 Pearson Education, Inc.Sources of Monopoly PowerlWhy do some firms have considerable monopoly power, and others have little or none?lMonopoly power is determined by ability to set price higher than marginal costlA firm’s monopoly power, therefore, is determined by the firm’s elasticity of demand54©2005 Pearson Education, Inc.Sources of Monopoly PowerlThe less elastic the demand curve, the more monopoly power a firm haslThe firm’s elasticity of demand is determined by:1) Elasticity of market demand2) Number of firms in market3) The interaction among firms55©2005 Pearson Education, Inc.Elasticity of Market DemandlWith one firm, their demand curve is market demand curvemDegree of monopoly power is determined completely by elasticity of market demandlWith more firms, individual demand may differ from market demandmDemand for a firm’s product is more elastic than the market elasticity56©2005 Pearson Education, Inc.Number of FirmslThe monopoly power of a firm falls as the number of firms increases; all else equalmMore important are the number of firms with significant market sharemMarket is highly concentrated if only a few firms account for most of the saleslFirms would like to create barriers to entry to keep new firms out of marketmPatent, copyrights, licenses, economies of scale57©2005 Pearson Education, Inc.Interaction Among FirmslIf firms are aggressive in gaining market share by, for example, undercutting the other firms, prices may reach close to competitive levelslIf firms collude (violation of antitrust rules), could generate substantial monopoly powerlMarkets are dynamic and therefore, so is the concept of monopoly power58©2005 Pearson Education, Inc.The Social Costs of Monopoly PowerlMonopoly power results in higher prices and lower quantitieslHowever, does monopoly power make consumers and producers in the aggregate better or worse off?lWe can compare producer and consumer surplus when in a competitive market and in a monopolistic market59©2005 Pearson Education, Inc.The Social Costs of MonopolylPerfectly competitive firm will produce where MC = D  PC and QClMonopoly produces where MR = MC, getting their price from the demand curve  PM and QMlThere is a loss in consumer surplus when going from perfect competition to monopolylA deadweight loss is also created with monopoly60©2005 Pearson Education, Inc.BALost Consumer SurplusBecause of the higher price, consumers lose A+B and producer gains A-C.CDeadweight Loss from Monopoly PowerQuantityAR=DMRMCQCPCPmQm$/QDeadweight Loss61©2005 Pearson Education, Inc.The Social Costs of MonopolylSocial cost of monopoly is likely to exceed the deadweight losslRent SeekingmFirms may spend to gain monopoly powerlLobbyinglAdvertisinglBuilding excess capacity62©2005 Pearson Education, Inc.The Social Costs of MonopolylThe incentive to engage in monopoly practices is determined by the profit to be gainedlThe larger the transfer from consumers to the firm, the larger the social cost of monopoly63©2005 Pearson Education, Inc.The Social Costs of MonopolylExamplemIn 1996, Archer Daniels Midland (ADM) successfully lobbied for regulations requiring ethanol to be produced from cornmAlthough ethanol is the same whether produced from corn, potatoes, grain or anything else, ADM had a near monopoly on corn-based ethanol production64©2005 Pearson Education, Inc.The Social Costs of MonopolylGovernment can regulate monopoly power through price regulationmRecall that in competitive markets, price regulation creates a deadweight lossmPrice regulation can eliminate deadweight loss with a monopolymThe effect of the regulation can be shown graphically 65©2005 Pearson Education, Inc.ARMRMCPmQmACP1Q1Marginal 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$/uantityP2 = PCQcP3Q3Q’3Any price below P4 resultsin the firm incurring a loss. P466©2005 Pearson Education, Inc.The Social Costs of Monopoly PowerlNatural MonopolymA firm that can produce the entire output of an industry at a cost lower than what it would be if there were several firmsmUsually arises when there are large economies of scalemWe can show that splitting the market into two firms results in higher AC for each firm than when only one firm was producing67©2005 Pearson Education, Inc.MCACARMR$/uantitySetting the price at Pr giving profits as large as possible without going out of businessQrPrPCQCIf the price were regulate to be Pc,the firm would lose moneyand go out of business. Can’t cover average costsPmQmUnregulated, the monopolistwould produce Qm and charge Pm.Regulating the Price of a Natural Monopoly68©2005 Pearson Education, Inc.The Social Costs of Monopoly PowerlRegulation in PracticemIt is very difficult to estimate the firm's cost and demand functions because they change with evolving market conditionsmAn 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 earn69©2005 Pearson Education, Inc.Regulation in PracticelThere are problems, however, with rate of return regulationlFirm’s capital stock is difficult to valuel“Fair〞 rate of return is based on actual cost of capital, that cost is based on regulatory behavior (and investor’s perception of allowed rates in the future)70©2005 Pearson Education, Inc.Regulation in PracticelRate of return regulation leads to lags in regulatory response to changes in cost and other market conditionslLeads to long and expensive regulatory hearingslThe hearing process creates a regulatory lag that may benefit producers (1950s & ‘60s) or consumers (1970s & ‘80s)71©2005 Pearson Education, Inc.Regulation in PracticelGovernment may also set price caps based on firm’s variable costs, past prices, and possibly inflation and productivity growthlA firm is typically allowed to raise its price each year without approval from regulatory agency by amount equal to inflation minus expected productivity growth72©2005 Pearson Education, Inc.MonopsonylA monopsony is a market in which there is a single buyerlAn oligopsony is a market with only a few buyerslMonopsony 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 market73©2005 Pearson Education, Inc.MonopsonylTypically choose to buy until the benefit from last unit equals that unit’s costlMarginal value is the additional benefit derived from purchasing one more unit of a goodmDemand curve – downward slopinglMarginal expenditure is the additional cost of buying one more unit of a goodmDepends on buying power74©2005 Pearson Education, Inc.MonopsonylCompetitive BuyermPrice takermP = Marginal expenditure = Average expendituremD = Marginal valuelGraphically can compare competitive buyer to competitive seller75Competitive BuyerCompared to Competitive SellerQuantityQuantity$/Q$/QD = MVME = AEP*Q*ME = MV at Q*ME = P*P* = MVAR = MRP*Q*MCMR = MCP* = MRP* = MCBuyerSeller76©2005 Pearson Education, Inc.Monopsonist BuyerlBuyer will buy until value from last unit equals expenditure on that unitlThe market supply curve is not the marginal expenditure curvemMarket supply shows how much must pay per unit as a function of total units purchasedmSupply curve is average expenditure curvemUpward sloping supply implies the marginal expenditure curve must lie above itmDecision to buy extra unit raises price paid for all units77©2005 Pearson Education, Inc.MES = AEMonopsonist BuyerQuantity$/QD = MVQ*mP*mMonopsony•ME above S•Quantity where ME = MV: Qm•Price from Supply curve: PmPCQCCompetitive•P = PC•Q = QC78©2005 Pearson Education, Inc.Monopoly and MonopsonylMonopsony is easier to understand if we compare to monopolylWe can see this graphicallylMonopolistmCan charge price above MC because faces downward sloping demand (average revenue)mMR < ARmMR = MC gives quantity less than competitive market and price that is higher79©2005 Pearson Education, Inc.Monopoly and MonopsonyQuantityMonopolyNote: MR = MC; AR > MR; P > MC$/QARMRMCQCPCP*Q*80©2005 Pearson Education, Inc.Monopoly and MonopsonyQuantity$/QMVMES = AEQ*P*PCQCMonopsonyNote: ME = MV;ME > AE; MV > P81©2005 Pearson Education, Inc.Monopoly and MonopsonylMonopolymMR < PmP > MCmQm < QCmPm > PClMonopsonymME > PmP < MVmQm < QCmPm < PC82©2005 Pearson Education, Inc.Monopsony PowerlMore common than pure monopsony are a few firms competing among themselves as buyers so that each firm has some monopsony powermAutomobile industrylMonopsony power gives them the ability to pay a price that is less than marginal value83©2005 Pearson Education, Inc.Monopsony PowerlThe degree of monopsony power depends on three factors:1.Number of buyerslThe fewer the number of buyers, the less elastic the supply and the greater the monopsony power2.Interaction Among BuyerslThe less the buyers compete, the greater the monopsony power84©2005 Pearson Education, Inc.Monopsony PowerlThe degree of monopsony power depends on three factors (cont’d):3.Elasticity of market supplylExtent to which price is marked down below MV depends on elasticity of supply facing buyerlIf supply is very elastic, markdown will be smalllThe more inelastic the supply, the more monopsony power85MES = AEMES = AEMonopsony Power:Elastic Versus Inelastic SupplyQuantityQuantity$/Q$/QMVMVQ*P*MV - P*P*Q*MV - P*ElasticInelastic86©2005 Pearson Education, Inc.Social Costs of Monopsony PowerlSince monopsony power gives lower prices and lower quantities purchased, we would expect sellers to be worse off and buyers better offlWe can show the effects of monopsony power using producer and consumer surplus compared to competitive marketmFor sole monopsonist, quantity is where ME = MV and price is from demandmFor competitive market, quantity and price where S = D87©2005 Pearson Education, Inc.CBDeadweight Loss from Monopsony PowerAQuantity$/QMVMES = AEPCQCDeadweight LossConsumers gain A-BQ*P*Lost Producer Surplus88©2005 Pearson Education, Inc.Monopsony PowerlBilateral MonopolymMarket where there is only one buyer and one sellermBilateral 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 commonmEven with bargaining, in general, monopsony and monopoly power will counteract each other89©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslMarket power harms some players in the market – buyer or sellerlMarket power reduces output, leading to deadweight losslExcessive market power could raise problems of equity and fairness90©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslWhat can we do to limit market power and keep it from being used anti-competitively?mTax away monopoly profits and redistribute to consumerslDifficult to measure and find all those who lostmDirect price regulation of natural monopoliesmKeep firms from acquiring excessive market powerlAntitrust laws91©2005 Pearson Education, Inc.The Antitrust LawslRules and regulations designed to promote a competitive economy by:mProhibiting actions that restrain or are likely to restrain competitionmRestricting the forms of allowable market structureslMonopoly power arises in a number of ways, each of which is covered by the antitrust laws92©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslSherman Act (1890) – Section 1mProhibits contracts, combinations, or conspiracies in restraint of tradelExplicit agreement to restrict output or fix priceslImplicit collusion through parallel conductmForm of implicit collusion in which one firm consistently follows actions of anothermExamplelIn 1999, four of the world’s largest drug and chemical companies were found guilty of fixing prices of vitamins sold in US93©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslSherman Act (1890) – Section 2mMakes it illegal to monopolize or attempt to monopolize a market and prohibits conspiracies that result in monopolization lClayton Act (1914)1.Makes it unlawful to require a buyer or lessor not to buy from a competitor94©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslClayton Act (1914)lProhibits predatory pricinglThe practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profitslProhibits mergers and acquisitions if they “substantially lessen competition〞 or “tend to create a monopoly〞95©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslRobinson-Patman Act (1936)mAmendment to the Clayton ActmProhibits price discrimination if it causes buyers to suffer economic damages and competition is reduced96©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslFederal Trade Commission Act (1914, amended 1938, 1973, 1975)1.Created the Federal Trade Commission (FTC)2.Supplements the Sherman and Clayton Acts by fostering competition through a set of prohibitions against unfair and anticompetitive practiceslProhibitions against deceptive advertising, labeling, agreements with retailer to exclude competing brands97©2005 Pearson Education, Inc.Enforcement of Antitrust LawsAntitrust laws are enforced three ways:1.Antitrust Division of the Department of JusticemA part of the executive branch – the administration can influence enforcementmFines levied on businesses; fines and imprisonment levied on individuals98©2005 Pearson Education, Inc.Enforcement of Antitrust Laws2.Federal Trade CommissionmEnforces through voluntary understanding or formal commission order3.Private ProceedingsmCan sue for treble damages (threefold damages)mIndividuals or companies can also ask for injunctions to force wrongdoers to cease anticompetitive actions99©2005 Pearson Education, Inc.Enforcement of Antitrust LawslUS antitrust laws are stricter and more far reaching than the rest of the worldmSome have claimed this has hindered US competing in international marketslWith growth of European Union, methods of antitrust enforcement have evolvedmSimilar to US laws with some procedural and substantive differencesmEurope only imposes civil penalties100©2005 Pearson Education, Inc.Limiting Market Power: The Antitrust LawslTwo ExamplesmAmerican AirlineslEarly 80’s president and CEO accused of attempting to price fixmMicrosoftlMonopoly powerlPredatory actionslCollusion101。