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Micro economics

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Microeconomics ­ECO402
VU
Lesson 33
The Social Costs of Monopoly Power
Monopoly power results in higher prices and lower quantities.
However, does monopoly power make consumers and producers in the aggregate better or
worse off?
Deadweight Loss from Monopoly Power
Because of the
Lost Consumer
$/Q
higher
MC rice, consumers
p
lose
Deadweight
A+B and producer
Loss
Pm
gains A-C.
A
B
PC
C
AR
MR
Quantity
QC
Qm
Rent Seeking
­ Firms may spend to gain monopoly power
 Lobbying
 Advertising
 Building excess capacity
The incentive to engage in monopoly practices is determined by the profit to be gained.
The larger the transfer from consumers to the firm, the larger the social cost of monopoly.
Price Regulation
­ Recall that in competitive markets, price regulation created a deadweight loss.
Question:
­ What about a monopoly?
153
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Microeconomics ­ECO402
VU
Price Regulation
Marginal revenue curve
when price is regulated
$/Q
to be no higher that P1.
MR
MC
Pm
P1
P2 = PC
AC
P3
If price is lowered to P3 output
decreases and a shortage exists.
AR
If left alone, a monopolist
Qm Q1
Q3
Q'3
Qc
Quantity
produces Qm and charges Pm.
Natural Monopoly
­ A firm that can produce the entire output of an industry at a cost lower than what it would
be if there were several firms.
Regulating the Price
of a Natural Monopoly
$/Q
Natural monopolies occur
because of extensive
economies of scale
Quantity
154
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Microeconomics ­ECO402
VU
Unregulated, the monopolist
would produce Qm and
$/Q
charge Pm.
If the price were regulate to be PC,
the firm would lose money
and go out of business.
Pm
Setting the price at Pr
yields the largest possible
output;excess profit is zero.
AC
Pr
MC
PC
AR
MR
Qm
Qr
QC
Quantity
Regulation in Practice
­ It is very difficult to estimate the firm's cost and demand functions because they change
with evolving market conditions
­ An 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 earn.
P = AVC + (D + T + sK)/Q, where
­ P = price, AVC = average variable cost
­ D = depreciation, T = taxes
­ s = allowed rate of return, K = firm's capital stock
Monopsony
A monopsony is a market in which there is a single buyer.
Monopsony 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.
Competitive Buyer
­ Price taker
­ P = Marginal expenditure = Average expenditure
­ D = Marginal value
Competitive Buyer: Compared to Competitive Seller
Buyer
Seller
$/
$/Q
MC
Q
AR = MR
ME = AE
P*
P*
MR = MC
P* = MR
ME = MV at
P* = MC
Q*
D = MV
ME = P*
P* = MV
Quantity
Quantity
Q*
Q*
155
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Microeconomics ­ECO402
VU
Monopsonist Buyer
The market supply curve is the monopsonist's
average expenditure curve
$/Q
ME
Monopsony
ME > P & above
S
S = AE
PC
Competitiv
P*m
e
P = PC
MV
Q = QC
Q*m
QC
Quantity
Monopoly
$/Q
Note: MR = MC;
AR > MC; P > MC MC
P*
PC
AR
MR
QC
Quantity
Q*
Monopoly and Monopsony
Monopsony
$/Q
ME
Note: ME = MV;
ME > AE; MV > P
S = AE
PC
P*
MV
Q*
QC
Quantity
156
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Microeconomics ­ECO402
VU
Monopoly
Monopsony
­ MR < P
­ ME > P
­ P > MC
­ P < MV
­
­
Qm < QC
Qm < QC
­ P
­
m>
PC
Pm < PC
157
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firmís Short-Run Costs ($):The Effect of Effluent Fees on Firmsí Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industryís Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisonersí Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor