IMPERFECT COMPETITION

IMPERFECT COMPETITION

THE LATER NEOCLASSICALS

EDWARD CHAMBERLIN 1899-1967 THE CASE FOR MONOPOLISTIC COMPETITION

DIFFERENT THAN MONOPOLY OF COURNOT, DUPUIT, AND THE CLASSICAL CONSIDERATIONS OF MONOPOLY

THIS THEORY DISTINGUISHES AMONGST SELLERS AND MARKETS

THE IDEA FOLLOWS COURNOT WITH A DOWNWARD SLOPING DEMAND AND DEMAND DIFFERENT FROM MARGINAL REVENUE

MC = MARGINAL COST; AC = AVERAGE COST; D = DEMAND; MR = MARGINAL REVENUE

MCAC

DMR

PRICE

QUANTITYB

L

MN

S

THE MONOPOLIST ENJOYS A TEMPORARY MONOPOLY, LIKE A GEOGRAPHIC MONOPOLY, OR A PRODUCT DIFFERENTIATION MONOPOLYPROFIT MAXIMIZATION IS WHERE MR = MC --- AT THAT POINT, B IS PRODUCED AND SOLD BUT AT PRICE M --- MONOPOLY PROFITS ARE THEN LMNSPRICE IS DERIVED FROM THE DEMAND CURVE

MONOPOLISTIC COMPETITION DEVELOPS ORIGINALLY BECAUSE OF PRODUCT DIFFERENTIATIONTHE PROFITS EARNED ATTRACT OTHER FIRMS TO GET INTO THE MARKET, BUT WITH A SLIGHTLY DIFFERENTIATED PRODUCT RELATIVE TO THE ORIGINAL MONOPOLIST

WITH THE NEW ENTRIES OF OTHER FIRMS INTO THE MARKET, THE DEMAND FOR THE PRODUCT OF THE ORIGINAL MONOPOLY IS EVENTUALLY REDUCED, AND REDUCES TO THE POINT WHERE AC IS NOW TANGENT TO DEMAND, AND PRICE CHARGED IS P, WHICH IS NOW EQUAL TO AC

MCAC

DMR

PRICE

QUANTITYA

P = AC N

THE LONG RUN PRICE BECOMES P = ACUNDER THESE CONDITIONS THERE IS A STABLIZATION IN THE MARKETTHERE IS NEITHER ENTRY NOR EXIT FROM THE MARKET AND MONOPOLIES COMPETE IN THE MARKET WITH DIFFERENTIATED PRODUCT

BOTH IN THE SHORTER RUN CASE AND IN THIS LONG RUN CASE, PRICE IS ALWAYS GREATER THAN MARGINAL COST --- THE NEW SALES (AND PRODUCTION) FOR THE ORIGINAL MONOPOLIST FIRM IS A ///// PRICE > MARGINAL COSTTHE POINT, N, EXCEEDS THE LOWEST POINT ON AC – HENCE THERE IS EXCESS CAPACITY AND ALLOCATIVE INEFFICIENCY BECAUSE P > MC

THIS CONCEPT OF MONOPOLISTIC COMPETITION LED TO THE ALLOCATIVE INEFFICIENCY – X-INEFFICIENCY DEBATES

X – INEFFICIENCY ARGUMENTS OF HARVEY LEIBENSTEIN (1922- 1993)

EXCESSIVE COSTS ARE INCURRED ON PART OF OR IN PART OF THE FIRM

CHAMBERLIN ARGUES THAT THERE IS RESOURCE MISALLOCATION BECAUSE PRICE > MARGINAL COST

IN COMPETITIVE MARKETS, PROFIT MAXIMIZATION COMES WHEN MARGINAL REVENUE = MARGINAL COST

MCAC

DMR

PRICE

QUANTITYB C

L

MN

S

UNDER PERFECT COMPETITION, THE PROFIT MAXIMIZATION POINT WOULD BE WHERE MC = DEMAND (D), AND DEMAND = MARGINAL REVENUE AT POINT KTHE PRICE CHARGED WOULD BE PC, AND PRICE = MARGINAL COST AT THAT POINT

THE SEPARATION OF DEMAND AND MARGINAL REVENUE COMES BY WAY OF MONOPOLY

KPC

NOTICE ALSO, THAT PRODUCTION (SALES) IS AT POINT C > B UNDER PERFECT COMPETITION

SMITH, IN WEALTH OF NATIONS – POINTED OUT THAT THE DIRECTORS OF A JOINT STOCK COMPANY (CORPORATION), BEING THE MANAGERS OF OTHER PEOPLE’S MONEY RATHER THAN THEIR OWN, CANNOT BE EXPECTED TO WATCH OVER THE OWNER’S MONEY WITH THE SAME VIGILANCE AS WOULD THE OWNERS IN A PRIVATE PARTNERSHIP. SMITH ASSERTED THAT NEGLIGENCE AND LAVISH EXPENDITURES THEREFORE MUST ALWAYS PREVAIL IN THE MANAGEMENT OF SUCH COMPANIES --- ONE OF HIS COMPLAINTS ON MONOPOLY

TODAY – ECONOMIST CALL THIS DIVERGENCE OF INTERESTS THE

PRINCIPAL-AGENT PROBLEM [ GEORGE AKERLOF, JOSEPH STIGLITZ, PAUL MILGROM, JOHN ROBERTS] THE PRINCIPALS ARE THE CORPORATE OWNERS – THE STOCKHOLDERS—THEY HIRE AGENTS IN THE FORM OF EXECUTIVES, MANAGERS, WORKERS, & LAWYERS TO CARRY OUT PROFIT MAXIMIZING ACTIVITIES ON THE PRINCIPAL’S BEHALF--- THE AGENTS, HOWEVER, TEND TO MAXIMIZE THEIR OWN UTILITY, NOT NECESSARILY THE PROFITS OF THE FACELESS STOCKHOLDERS -- THE UTILITY MAY BE ACCOMPLISHED THROUGH CORPORATE EXPENDITURES THAT RAISE, NOT LOWER, THEIR EMPLOYER’S COSTS – SUCH AS ELABORATE BUILDINGS AND OFFICES, THE COMPANY JET, HIRING OF UNNECESSARY SUBORDINATES, UNDERTAKE UNPROFITABLE MERGERS, ETC.

X-INEFFICIENCY THE AGENT HAS MORE INFORMATION THAN THE PRINCIPAL A PROBLEM

TODAY, WE TIE PAY TO PROFIT IN AN ATTEMPT TO REDUCE X-INEFFICIENCY

WE INTRODUCE STOCK OPTION PLANS TO REDUCE X-INEFFICIENCY

BUT THIS CAN ALSO PROVIDE THE INCENTIVE FOR THE CEO TO PUT A COMPANY AT GREAT RISK IN ORDER TO MAXIMIZE THE VALUE OF HER STOCK HOLDINGS!

X-INEFFICIENCY IS MORE LIKELY IN OLIGOPOLY FIRMS AND MONOPOLY FIRMS

THIS CONDITION IS NOT LIKELY IN FIRMS OPERATING IN A PERFECTLY COMPETITIVE MARKET

X-INEFFICIENCY CAN CAUSE FIRMS TO HAVE LOWER STOCK VALUE --- BECAUSE OF THE FAILURE TO MINIMIZE COST OR TO SEEK COST REDUCING PRODUCTION AND SALES METHODS

THE TENDENCY TO LOWER STOCK VALUE INDUCES OTHER FIRMS OR COMBINATION OF FIRMS TO MAKE “TENDER OFFERS”

THE OFFER IS FOR HIGHER VALUE OF THE STOCK IN THE X-INEFFICIENT FIRM THAN THE STOCK MARKET VALUE OF SUCH SHARES

THE BUYERS THEN WREST CONTROL OF THE FIRM --- IMPROVE ITS VALUE AND RAISE THE STOCK MARKET VALUE

THE SHARES ARE THEN TRADED FOR A GAIN THIS ACTION IS ALSO A CONTROL ON X-

INEFFICIENCY

MISALLOCATION OF RESOURCES IN THE LONG RUN MONOPOLISTIC COMPETITION FIRM WILL CONTINUE TO EXIST

HENCE THE LOWER ECONOMIC WELFARE ASSOCIATED WITH MONOPOLISTIC COMPETITION

JOAN ROBINSON (1903 -1983) LIKE A.C. PIGOU AND JOHN MAYNARD

KEYNES, ROBINSON IS A STUDENT OF ALFRED MARSHALL

SHE MADE GREAT CONTRIBUTIONS TO NEOCLASSICAL MICROECONOMICS, KEYNESIAN MACROECONOMICS, AND POST-KEYNESIAN MACROECONOMICS

HERE, WE COVER HER CONTRIBUTIONS TO MICROECONOMICS

IMPERFECT COMPETITION: THE CASE OF MONOPSONY THE BOOK --- ECONOMICS OF

IMPERFECT COMPETITION SHE DEVELOPS THE CASE FOR

MONOPSONY MARKETS IN THE INPUT MARKET

SHE PRIMARILY DEVELOPS THE CASE FOR LABOR EXPLOITATION IN MARKETS WITH IMPERFECT COMPETITION

THE SINGLE BUYER OF LABOR CASE

MONOPSONY:SINGLE BUYER IN THE INPUT MARKET- SINGLE SELLER OF THE INPUT CASE ---- VMP = VALUE OF MARGINAL PRODUCT, MC = MARGINAL COST, MR = MARGINAL REVENUE

INPUT RETURN

INPUT

AVERAGE EXPENDITURE ON INPUT(SUPPLY)

MARGINAL INPUT COST

VALUE OF MARGINAL PRODUCT

MARGINAL REVENUE PRODUCT

VMP RETURN

MONOPSONY RETURN

MC = MR

UNDER THESE CONDITIONS, THE EQUILIBRIUM IS WHERE MC = MR --- INPUT LM,M IS EMPLOYED --- THE VMP OF THAT EMPLOYMENT IS AT THE VMP RETURN --- BUT THE PAYMENT TO THE INPUT(LIKE A WAGE IN THE CASE OF LABOR) IS THE MONOPSONY RETURN ---- ROBINSON SUGGESTED THAT THE MONOPSONY EXPLOITATION IS (MC=MR RETURN) – (MONOPSONY RETURN), AND MONOPOLY EXPLOITATION IS (VMP RETURN) – (MC=MR RETURN)

MC = MR DICTATES THE EQUILIBRIUM, BUT THE RETURN TO INPUT IS DERIVED FROM THE SUPPLY FUNCTION AT THAT POINT WHICH EQUALS THE MONOPSONY RETURN TO INPUT

LM,M

VMP = PRICE x INPUT MARGINAL PRODUCT

MONOPSONY:SINGLE BUYER IN THE INPUT MARKET- COMPETITIVE SELLING OF THE INPUT CASE ---- VMP = VALUE OF MARGINAL PRODUCT, MC = MARGINAL COST, MR = MARGINAL REVENUE

INPUT RETURN

INPUT

AVERAGE EXPENDITURE ON INPUT(SUPPLY)

MARGINAL INPUT COST

VALUE OF MARGINAL PRODUCT

VMP RETURN

MONOPSONY RETURN

MC = MR

UNDER THESE CONDITIONS, THE EQUILIBRIUM IS WHERE MC = MR --- INPUT LM IS EMPLOYED --- THE VMP OF THAT EMPLOYMENT IS AT THE VMP RETURN --- BUT THE PAYMENT TO THE INPUT(LIKE A WAGE IN THE CASE OF LABOR) IS THE MONOPSONY RETURN ---- ROBINSON SUGGESTED THAT THE MONOPSONY EXPLOITATION IS (VMP RETURN) – (MONOPSONY RETURN) IN THIS CASE

MC = MR DICTATES THE EQUILIBRIUM, BUT AGAIN, THE RETURN TO INPUT IS DERIVED FROM THE SUPPLY FUNCTION AT THAT POINT WHICH EQUALS THE MONOPSONY RETURN TO INPUT

LM

ROBINSON WOULD SUGGEST THAT THE PURPOSE OF UNIONS WOULD BE TO NEGOTIATE A WAGE UPWARDS FROM THE MONOPSONY RETURN TO THE VMP RETURN

INPUT RETURN

INPUT

AVERAGE EXPENDITURE ON INPUT(SUPPLY)

MARGINAL INPUT COST

VALUE OF MARGINAL PRODUCT

MARGINAL REVENUE PRODUCT

VMP RETURN

MONOPSONY RETURN

MC = MR

THE UNION WOULD HAVE TO MONOPOLIZE THE SELLING OF LABOR IN ORDER TO OBTAIN BARGAINING POWER TO NEGOTIATE WAGE UPWARD ---- HENCE REDUCE THE NUMBER OF WORKERS OFFERED AS CAN BE SEEN IN THIS CASE --- MONOPSONY-MONOPOLY CONDITIONS EVOLVE

LM,M

VMP WAGE UNDER ONLY MONOPSONY BUYING OF LABOR

BY ORGANIZING, LABOR WOULD NEED TO NEGOTIATE WAGE TO AT LEAST THE VMP WAGE UNDER ONLY MONOPSONY

OTHERWISE, THERE IS NO REASON TO LIMIT LABOR SUPPLY TO THE MONOPSONISTIC MARKET

ROBINSON LATER OFFERS A CRITIQUE OF MARXIAN THOUGHT AND THE MARXIAN VIEW OF THE DEMISE OF CAPITALISM

BUT SHE LATER BECOMES A CRITIC OF CONVENTIONAL NEOCLASSICAL ECONOMICS BECAUSE OF THE EXPLOITATION CONDITIONS OF IMPERFECT COMPETITION

SHE IS ALSO CRITICAL OF THE NEOCLASSICAL MONETARY THEORY

ROBINSON DERIVES CASES AND THEN REMARKS “THE LABORERS ARE EXPLOITED BY THE CAPITALISTS AND THE INDUSTRIAL MONOPOLISTS”

THEN SHE TRACES HER CRITIQUE OF THE MARGINALIST APPROACH INCORPORATED IN THE NEOCLASSICAL THEORY

THEN SHE SIDES WITH THE POST-KEYNES CRITICS OF MACROECONOMIC POLICY

BERGMANN’S ANALYSIS REFINED

MARGINAL REVENUE PRODUCT

WAGES

MEN’S LABORWOMEN’S LABOR

BERGMANN’S IDEA OF DISCRIMINATION

BECAUSE OF THE SHARPLY RISING MARGINAL

EXPENDITURE FUNCTION FOR WOMEN’ LABOR

MARGINAL EXPENDITURE

SUPPLY OR AVERAGE EXPENDITURE

ASSUMES MONOPSONY LABOR MARKETS

Another look at “monopsony” //// return to input, w, is higher as derived from demand (MRP) = supply than it is from marginal cost = MRP

Monopsony >> a single buyer faces many sellers

Supply

Maximize profits atTR(L) – W(L)LTR/L = W(L) + W(L)/L

So new workers get W’(L)L more than W(L)

Same for buying other inputs

A monopsonist employer maximizes profits with employment L, that equates demand, given by the marginal revenue product (MRP) curve, to marginal cost MC at point A. The wage is then determined on the supply curve, at point M, and is equal to w. By contrast, a competitive labor market would reach equilibrium at point C, where supply S equals demand. This would lead to employment L' and wage w'.