【经济课件】Ch10 MARKET POWER MONOPOLY AND MONOPSONY.doc

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1、PART IIIMARKET STRUCTURE AND COMPETITVE STRATEGYCHAPTER 10MARKET POWER: MONOPOLY AND MONOPSONYTEACHING NOTESThis chapter covers both monopoly and monopsony in order to highlight the similarity between the two types of market power. The chapter begins with a discussion of monopoly in sections 1-4. Se

2、ction 5 first discusses monopsony, and then offers an instructive comparison of monopoly and monopsony. Section 6 discusses sources of monopsony power and the social costs of monopsony power, while section 7 concludes with a discussion of antitrust law. If you are pressed for time you might choose t

3、o only cover the first four sections on monopoly and skip the remainder of the chapter. Section 7 can be covered even if you choose to skip sections 5 and 6. The last part of section 1 on the multiplant firm can also be skipped if you are pressed for time.Although chapter 8 presented the general rul

4、e for profit maximization, you should review marginal revenue and price elasticity of demand through a careful derivation of Equation 10.1. A discussion of the derivation of Equation 10.1 will elucidate the geometry of Figure 10.3. Point out that because marginal revenue is positive at the profit ma

5、ximizing level of price and quantity for a monopolist, demand at that quantity is elastic. Equation 10.1 also leads directly to the Lerner Index in Section 10.2. This provides fruitful ground for a discussion of a monopolists market power. For example, if Ed is large (e.g., because of close substitu

6、tes), then (1) the demand curve is relatively flat, (2) the marginal revenue curve is relatively flat (although steeper than the demand curve), and (3) the monopolist has little power to raise price above marginal cost. To reinforce these points, introduce a non-linear demand curve by, for example,

7、showing the location of the marginal revenue curve for a unit-elastic demand curve. Once this concept has been clearly presented, the discussion of the effect of an excise tax on a monopolist with non-linear demand (Figure 10.5) will not seem out of place.The social costs of market power are a good

8、topic for class discussion, and this topic can be introduced by comparing the deadweight loss associated with monopoly with the analysis of market intervention given in Chapter 9. For example, compare Figure 10.10 with Figure 9.5. Given that Exercises (9), (13), and (15) involve “kinked marginal rev

9、enue curves,” you should present Figure 10.11 if you plan to assign those problems. Although Figure 10.11 is complicated, exposure to it here will help when it reappears in Chapter 12.REVIEW QUESTIONS1. A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should

10、it adjust its output to increase profit?When marginal cost is greater than marginal revenue, the incremental cost of the last unit produced is greater than incremental revenue. The firm would increase its profit by not producing the last unit. It should continue to reduce production, thereby decreas

11、ing marginal cost and increasing marginal revenue, until marginal cost is equal to marginal revenue.2. We write the percentage markup of prices over marginal cost as (P - MC)/P. For a profit-maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed

12、 as a measure of monopoly power?We can show that this measure of market power is equal to the negative inverse of the price elasticity of demand.The equation implies that, as the elasticity increases (demand becomes more elastic), the inverse of elasticity decreases and the measure of market power d

13、ecreases. Therefore, as elasticity increases (decreases), the firm has less (more) power to increase price above marginal cost.3. Why is there no market supply curve under conditions of monopoly?The monopolists output decision depends not only on marginal cost, but also on the demand curve. Shifts i

14、n demand do not trace out a series of prices and quantities that we can identify as the supply curve for the firm. Instead, shifts in demand lead to changes in price, output, or both. Thus, there is no one-to-one correspondence between the price and the sellers quantity; therefore, a monopolized mar

15、ket lacks a supply curve.4. Why might a firm have monopoly power even if it is not the only producer in the market?The degree of monopoly (or market) power enjoyed by a firm depends on the elasticity of the demand curve that it faces. As the elasticity of demand increases, i.e., as the demand curve

16、becomes flatter, the inverse of the elasticity approaches zero and the monopoly power of the firm decreases. Thus, if the firms demand curve has any elasticity less than infinity, the firm has some monopoly power. It is only the competitive firm that faces a horizontal demand curve who has no market

17、 power.5. What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each.The firms ability to exercise monopoly power depends on how easy it is for other firms to enter the industry. There are several barriers to entry, including exclusive rights

18、(e.g., patents, copyrights, and licenses) and economies of scale. These two barriers to entry are the most common. Exclusive rights are legally granted property rights to produce or distribute a good or service. Positive economies of scale lead to “natural monopolies” because the largest producer ca

19、n charge a lower price, driving competition from the market. For example, in the production of aluminum, there is evidence to suggest that there are scale economies in the conversion of bauxite to alumina. (See U.S. v. Aluminum Company of America, 148 F.2d 416 1945, discussed in Exercise 8, below.)6

20、. What factors determine the amount of monopoly power an individual firm is likely to have? Explain each one briefly.Three factors determine the firms elasticity of demand: (1) the elasticity of market demand, (2) the number of firms in the market, and (3) interaction among the firms in the market.

21、The elasticity of market demand depends on the uniqueness of the product, i.e., how easy it is for consumers to substitute away from the product. As the number of firms in the market increases, the demand elasticity facing each firm increases because customers may shift to the firms competitors. The

22、 number of firms in the market is determined by how easy it is to enter the industry (the height of barriers to entry). Finally, the ability to raise the price above marginal cost depends on how other firms react to the firms price changes. If other firms match price changes, customers will have lit

23、tle incentive to switch to another supplier.7. Why is there a social cost to monopoly power? If the gains to producers from monopoly power could be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain briefly.When the firm exploits its monopoly power by charging

24、 a price above marginal cost, consumers buy less at the higher price. Consumers enjoy less surplus, the difference between the price they are willing to pay and the market price on each unit consumed. Some of the lost consumer surplus is not captured by the seller and is a deadweight loss to society

25、. Therefore, if the gains to producers were redistributed to consumers, society would still suffer the deadweight loss.8. Why will a monopolists output increase if the government forces it to lower its price? If the government wants to set a price ceiling that maximizes the monopolists output, what

26、price should it set?By restricting price to be below the monopolists profit-maximizing price, the government can change the shape of the firms marginal revenue, MR, curve. When a price ceiling is imposed, MR is equal to the price ceiling for all quantities lower than the quantity demanded at the pri

27、ce ceiling. If the government wants to maximize output, it should set a price equal to marginal cost, or in other words set price at the point where the demand curve and the marginal cost curve intersect. Prices below this level induce the firm to decrease production, assuming the marginal cost curv

28、e is upward sloping. The regulators problem is to determine the shape of the monopolists marginal cost curve. This task is difficult given the monopolists incentive to hide or distort this information.9. How should a monopsonist decide how much of a product to buy? Will it buy more or less than a co

29、mpetitive buyer? Explain briefly.The marginal expenditure is the change in the total expenditure as the purchased quantity changes. For a firm competing with many firms for inputs, the marginal expenditure is equal to the average expenditure (price). For a monopsonist, the marginal expenditure curve

30、 lies above the average expenditure curve because the decision to buy an extra unit raises the price that must be paid for all units, including the last unit. All firms should buy inputs so that the marginal value of the last unit is equal to the marginal expenditure on that unit. This is true for b

31、oth the competitive buyer and the monopsonist. However, because the monopsonists marginal expenditure curve lies above the average expenditure curve and because the marginal value curve is downward sloping, the monopsonist buys less than a firm would buy in a competitive market.10. What is meant by

32、the term “monopsony power”? Why might a firm have monopsony power even if it is not the only buyer in the market?Monopsony power refers to the buyers ability to affect the price of a good. This power enables the buyer to purchase the good for a lower price, as compared to a competitive factor market

33、. Any buyer facing an upward-sloping factor supply curve has some monopsony power. In a competitive market, the seller faces a perfectly-elastic market demand curve and the buyer faces a perfectly-elastic market supply curve. Thus, any characteristic of the market (e.g., when there are a small numbe

34、r of buyers or if buyers engage in collusive behavior) that leads to a less-than-perfectly-elastic supply curve gives the buyer some monopsony power.11. What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have?The individual firms m

35、onopsony power depends on the characteristics of the “buying-side” of the market. There are three characteristics that enhance monopsony power: (1) the elasticity of market supply, (2) the number of buyers, and (3) how the buyers interact. First, if market supply is very inelastic, then the buyer wi

36、ll enjoy more monopsony power. When supply is very elastic, marginal expenditure and average expenditure do not differ by much, so price will be closer to the competitive price. Second, the fewer the number of buyers, the greater the monopsony power. Third, if buyers are able to collude and/or they

37、do not compete very aggressively with each other then each will enjoy more monopsony power.12. Why is there a social cost to monopsony power? If the gains to buyers from monopsony power could be redistributed to sellers, would the social cost of monopsony power be eliminated? Explain briefly.With mo

38、nopsony power, the price is lower and the quantity is less than under competitive buying conditions. Because of the lower price and reduced sales, sellers lose revenue. Only part of this lost revenue is transferred to the buyer as consumer surplus, and the net loss in total surplus is deadweight los

39、s. Even if the consumer surplus could be redistributed to sellers, the deadweight loss persists. This inefficiency will remain because quantity is reduced below the level where price is equal to marginal cost.13. How do the antitrust laws limit market power in the United States? Give examples of maj

40、or provisions of the laws.Antitrust laws, which are subject to interpretation by the courts, limit market power by proscribing a firms behavior in attempting to maximize profit. Section 1 of the Sherman Act prohibits every restraint of trade, including any attempt to fix prices by buyers or sellers.

41、 Section 2 of the Sherman Act prohibits behavior that leads to monopolization. The Clayton Act, with the Robinson-Patman Act, prohibits price discrimination and exclusive dealing (sellers prohibiting buyers from buying goods from other sellers). The Clayton Act also limits mergers when they could su

42、bstantially lessen competition. The Federal Trade Commission Act makes it illegal to use unfair or deceptive practices.14. Explain briefly how the U.S. antitrust laws are actually enforced.Antitrust laws are enforced in three ways: (1) through the Antitrust Division of the Justice Department, whenev

43、er firms violate federal statutes, (2) through the Federal Trade Commission, whenever firms violate the Federal Trade Commission Act, and (3) through civil suits. The Justice Department can seek to impose fines or jail terms on managers or owners involved or seek to reorganize the firm, as it did in

44、 its case against A.T.& T. The FTC can seek a voluntary understanding to comply with the law or a formal Commission order. Individuals or companies can sue in federal court for awards equal to three times the damage arising from the anti-competitive behavior.EXERCISES1. Will an increase in the deman

45、d for a monopolists product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.As illustrated in Figure 10.4b in the textbook, an increase in demand need not always result in a higher price. Under the conditions

46、 portrayed in Figure 10.4b, the monopolist supplies different quantities at the same price. Similarly, an increase in supply facing the monopsonist need not always result in a higher price. Suppose the average expenditure curve shifts from AE1 to AE2, as illustrated in Figure 10.1. With the shift in

47、 the average expenditure curve, the marginal expenditure curve shifts from ME1 to ME2. The ME1 curve intersects the marginal value curve (demand curve) at Q1, resulting in a price of P. When the AE curve shifts, the ME2 curve intersects the marginal value curve at Q2 resulting in the same price at P

48、.Figure 10.12. Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise them on pricing policy. One of the things the company would like to know is how much a 5 percent increase in price is likely to reduce sales. What would you need to know to help t

49、he company with this problem? Explain why these facts are important.As a large producer of farm equipment, Caterpillar Tractor has market power and should consider the entire demand curve when choosing prices for its products. As their advisor, you should focus on the determination of the elasticity of demand for each product. There are three important factors to be consider