chapter7 slides

Part  III    Imperfectly  Compe00ve  Markets    

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Imperfect  vs.  Perfect  

Im-­‐perfect  =  Perfect  except  that  one  or  more  of  the  following  assump?ons  apply:      •  Consumers/suppliers  are    price-­‐takers,  or  •  Goods  are    homogeneous,  or  •  There    externali?es,  or  •  Goods  are    excludable  and  rival,  or  

 (not  full)  informa?on,  or    free  entry  and  exit.  

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Imperfect  vs.  Perfect  

Im-­‐perfect  =  Perfect  except  that:      •  Consumers/suppliers  are  NOT  price-­‐takers,  •  Goods  are  NOT  homogeneous,  or  •  There  ARE  externali?es,  or  •  Goods  are  NOT  excludable  and  rival,  or  •  Imperfect  (not  full)  informa?on,  or  •  NO  free  entry  and  exit.  

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Market  Power  

Defini0on:    A  firm  is  said  to  be  a  Price-­‐Maker  (or  Price-­‐SeJer)  if  it  has  the  ability  to  set  its  own  prices.  A  firm  has  Market  Power  if  it  has  the  ability  to  set  its  own  price.  

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Market  Power  

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Types  of  Market  Power  

: Only  one  firm  in  the  market  (à  the  firm’s  individual  D  curve  =  market  D  curve!)  

:  There  is  a  large  number  of  firms,  each  producing  slightly  differen?ated  goods  (almost  perfect  subs?tutes).  

:  There  is  a  small  number  of  firms  selling  goods  that  are  close  subs?tutes.  

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An?dote  to  Market  Power    

Free  Entry  /  Exit!      

Otherwise,   :  Over

 Barriers  to  Entry  

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Increasing  Returns  to  Scale  (IRS)  

Defini0on:    We  say  that  there  are  Increasing  Returns  to  Scale  (Economies  of  Scale)  when  the  average  cost  of  producing  a  certain  good  decreases  with  the  amount  of  the  good  produced.  

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Increasing  Returns  to  Scale  (IRS)  

à Firms  experiencing  IRS  become  more  profitable  with  size  à   A  single  firm  producing  a  large  quan?ty  of  the  good  can  do  so  more  efficiently  than  a  large  number  of  firms  each  producing  small  quan??es.  

Natural  Monopoly!  

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Increasing  Returns  to  Scale  (IRS)  

Defini0on:    A  Natural  Monopoly  denotes  a  monopoly  that  occurs  because  of  increasing  returns  to  scale.  

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Chapter  7:  Market  Power  Monopoly  

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Market  Power:  Monopoly  

Defini0on:  Monopoly  is  a  market  structure  where  there  is  only  one  firm  opera?ng  in  the  market.  

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Market  Power:  Monopoly  

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Market  Power:  Monopoly  

MR=P=const  

(MR=)D  is  downward-­‐sloping

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Market  Power:  Monopoly  

MR=ΔR/ΔQ=  =(400*.65-­‐200*.85)/(400-­‐200)  

=  $0.45  

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Market  Power:  Monopoly  

MR=MC  ©  Playconomics,  LHS   16  

Monopoly  and  the  Invisible  Hand  

Socially  op0mal    monopolist  op0mal  

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Monopoly  and  the  Invisible  Hand  

To  sell  the  extra  units  of  the  good  and  adract  new  consumers,  the  monopolist  needs  to  ê  P  à  affects  all  units  sold  (because  the  monopolist  needs  to  charge  all  consumers  the  same  price)  à  implicit  cost  in  é    Q  sold  à    

Q*monopoly  <  Q*socially  

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Monopoly  and  the  Invisible  Hand  

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Government  Regula?on  

Compe00on  Law:    Compe00on  Law  denotes  a  law  that  is  intended  to  foster  market  compe??on  by  regula?ng  the  an?-­‐compe??ve  conduct  of  firms.    

ensures  that  consumers  are  charged  the  lowest  possible  prices  

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Government  Regula?on  

Average  Cost  Pricing  (esp.  for  natural  monopolies):    The  Average  Cost  Pricing  denotes  a  policy  through  which  the  government  forces  the  monopolist  to  set  the  price  and  quan?ty  at  the  intersec?on  of  the  ATC  curve  and  demand  curve.  

eliminates  any  posi?ve  profit  accrued  to  the  monopolist  

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Government  Regula?on  

The  Average  Cost  Pricing  is  hard  to  implement:  (it  can  

only  es?mate  them)  •  once  implemented,  

to  lower  their  costs  •  when  implemented,  the  

alloca0vely  inefficient.  

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Government  Regula?on  

Defini0on:    A  firm’s  output  is  said  to  be  Alloca0vely  Inefficient  if  the  price  asked  for  the  goods  produced  exceeds  their  marginal  cost.  

Set  Price  Ceiling  at  MC    à  But  in  same  cases   ,  the  industry  collapses!  

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First  Degree  Price  Discrimina?on  What  if  the  monopolist  could  set  a  different  

price  for  different  consumers?    

Assume  that  the  monopolist    -­‐  knows  the  maximum  price  (or  reserva?on  

price)  that  every  consumer  is  willing  to  pay  AND    

-­‐  can  charge  each  consumer  exactly  his  reserva?on  price.  

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First  Degree  Price  Discrimina?on  

Defini0on:    First  Degree  Price  Discrimina0on  describes  a  situa?on  in  which  the  monopolist  knows  the  reserva?on  price  of  each  consumer  and  is  able  to  charge  each  consumer  his  marginal  benefit  (or  reserva?on  price).  

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First  Degree  Price  Discrimina?on  

(selling  more  in  Country  A  does  not  require  the  monopolist  to  ê  P  in  other  countries)  

 ©  Playconomics,  LHS   26  

First  Degree  Price  Discrimina?on  

A  monopolist  engaging  in  1st  degree  price  discrimina?on  is  actually  selling  the  socially  op?mal  quan?ty  (that  max.  social  surplus)!  

BUT  uneven   :      

The  monopolist  extracts  all  surplus  from  the  consumers  (i.e.,  it  accrued  all  the  surplus  

available  in  the  market).  

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Other  Forms  of  Price  Discrimina?on  

•  Second  degree  price  discrimina0on:  the  monopolist  charges  

by  each  consumer  (bulk  discount,  economy/business  airfare,  etc).  

•  Third  degree  price  discrimina0on:  the  monopolist  charges  

such  as  loca?on  (European  vs.  Australia  as  2  #  mkts)  

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Third  Degree  Price  Discrimina?on  

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Third  Degree  Price  Discrimina?on  

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Third  Degree  Price  Discrimina?on  

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