Market Equilibrium and Market Demand: Imperfect Competition Chapter 9.

MarketEquilibrium and Market Demand:

Imperfect Competition

Chapter 9

Market Structure CharacteristicsWe characterize an

industry byNo. of firms and size dist.Product differentiation

Unique products?Barriers to entryThe picture to the right

concerned with two markets:

Pages 145-1482

No. 2 yellow corn: many producers and sellers (Perfect Competition)

Farm equipment: few manufacturers and sellers (Oligopoly)

Perfect CompetitionWe have been assuming the firm and market

reflect conditions of perfect competitionNot a bad assumption for many agric. subsectorsA large number of small firms

2 million farmsA homogeneous product

No. 2 yellow cornFreely mobile resources

No barriers to entry caused by patents, etc. or barriers to exit (???)

Perfect knowledge of market conditions Quality outlook information from government, university

and private sources Dramatic reduction in costs of obtaining information and

increase the speed of information acquisition

3

Imperfect Competition

Many markets in which farmers buy inputs and sell their products however do not reflect perfect competition conditions

Chapter 9 focuses on specific types of imperfect competitors in the farm input marketThese firms are capable of setting prices

farmers must pay for specific inputs

4

Imperfect Competition in Selling

5

Measures of Concentration

Page 148-1516

Quantitative measures of the degree of competition in a marketConcentration Ratio (CR)

% of the total market revenue accounted for by 2 (CR2), 4 (CR4), 8 (CR8), 20 (CR20), etc. largest firms in the industry

Low CR values→ a high degree of competition High CR values → an absence of competition

Page 148-1517

Quantitative measures of competitionHerfindahl-Hirschman Index (HHI)

The square of % market share of each firm summed over the largest 50 firms or all firms if there are < 50 firms in the industry

Perfect competition, HHI is small Only 1 firm, HHI is 10,000 = (1002) U.S. Justice Department

o HHI < 1,000 competitive marketso HHI > 1,800 could be considered concentrated

industry worthy of Justice Dept. examination of any purchases of other firms in the industry

Measures of Concentration

Page 148-1518

  HHI CR4 CR8 CR20 CR50   HHI CR4 CR8 CR20 CR50All Food Manufac. 102 14.8 22.8 37.6 50.8 Soft Drinks 1095 58.1 70.8 83.8 94.0

Flour Manufac. 831 54.5 67.7 82.9 95.5 Cigarettes ----- 97.8 99.4 100.0 -----Soybean Processing 1931 81.5 91.1 98.4 99.9 Carpet/Rug Mills 1650 63.6 74.5 87.5 95.9

Breakfast Cereal 2425 80.4 91.9 99.6 100.0 Pulp Mills 1024 53.9 81.9 99.7 100.0Fluid Milk 1075 46.0 58.1 71.7 86.8 Petrochemical 2535 79.6 93.5 99.8 100.0

Cheese Manufac. 379 31.5 46.9 70.8 88.8 Aluminum 2250 76.7 94.6 99.9 100.0Poultry Processing 738 45.7 57.5 76.9 91.5 Farm Equipment 1829 59.0 65.4 74.1 83.3

Snack Food 1989 53.2 60.7 73.2 85.8 Auto/Light Truck 2022 73.7 91.6 99.3 99.8

Whether an industry is concentrated depends on how narrowly it is defined In terms of the product it produces Extent of the geographic area it serves

Measures of Concentration

Consolidation in the U.S. Dairy Industry

Page 1659

Page 148-15110

Measures of Concentration

Page 148-15111

Measures of ConcentrationCooperative CR Values of Total U.S. Milk Marketed

Page 148-15112

Measures of ConcentrationArea Dec ′97 Dec ′98 Dec ′99 Area Dec ′97 Dec ′98 Dec ′99

Atlanta 38.5 47.8 52.4 Atlanta 81.6 80.3 75.9

Boston 66.2 85.4 88.1 Boston 84 89.3 83.4

Charlotte

64.4 74.7 73.9 Charlotte

38.5 47.8 52.4

Cincinnati

66.8 79.3 81.9 Cincinnati

90.3 87.6 97.4

Dallas 85 84.3 79.4 Dallas 87.7 90.4 92.5

Denver 69.3 68.1 66.9 Denver 59 63.4 63.3

Miami 89.4 96.5 96.3 Miami 45.7 43.7 54.5

1999 U.S. CR4: 26.8

14-Market

Avg.69 74.2 75.6

Percentage of Fluid Milk Marketed by 4 Largest Processor Dec. 1997- Dec. 1999 by City (Source: GAO, 2001)

Topics for DiscussionMonopolistic Competition

Definition Production and Pricing Decisions

Oligopolies Definition/Examples Production and Pricing Decisions

Monopolies Definition/Examples Production and Pricing Decisions

Comparison of Market StructuresPages 106-10713

14

Imperfect Competition in SellingAt the firm level, unlike perfect

competitors who face a perfectly elastic (horizontal) demand curveImperfect competitors selling a

differentiated product have a downward sloping demand curve

A

B

Firm’s demand curve underimperfect competition

Firm’s demand curve underimperfect competition

A B

Firm’s demand curveunder P.C.

Firm’s demand curveunder P.C.

QQ

$$

15 Page 149

Price Quantity Total Rev. Avg. Revenue Marginal Revenue

15 0 0 -------- -----

14 2 28 14 14

13 4 52 13 12

12 6 72 12 10

11 8 88 11 8

10 10 100 10 6

9 12 108 9 4

8 14 112 8 2

7 16 112 7 0

6 18 108 6 -2

5 20 100 5 -4

4 22 88 4 -6

3 24 72 3 -8

2 26 52 2 -10

1 28 28 1 -12

0 30 0 ----- -14

Table 9-1 ImperfectCompetition

Marginal Revenue (MR) : Change in revenue from the sale of the last unit of output (ΔTR÷ΔQ)

Average Revenue (AR): Total Revenue/Total output (TR÷Q)

Marginal Revenue (MR) : Change in revenue from the sale of the last unit of output (ΔTR÷ΔQ)

Average Revenue (AR): Total Revenue/Total output (TR÷Q)

20

Note: Price = Average Revenue

Note: Price = Average Revenue

Firm faces a downward sloping demand curve →

MR ≤ AR

Firm faces a downward sloping demand curve →

MR ≤ AR2

Page 15016

Imperfect Competition in Selling

Marginal Revenue (MR): Change in revenue from the sale of the last unit of output

Marginal Revenue (MR): Change in revenue from the sale of the last unit of output

TRMR

Q

Page 150

Marginal revenue in this instance is also downward sloping

MR=0 at the point where TR is at a maximum

Marginal revenue in this instance is also downward sloping

MR=0 at the point where TR is at a maximum17

Imperfect Competition in Selling

Maximum Total Revenue

Types of Imperfect Competitors in Input Markets

Monopolistic Competition Oligopoly Monopoly

18

Let’s start here…Let’s start here…

Monopolistic CompetitorsMany sellers

Each firm has relatively small market share

Power to set prices somewhat like a monopoly

Face competition like perfect competition

Collusion is not possible given number of firms in the industry

No barriers to entry or exit

Page 148-15119

Monopolistic Competitors

Page 148-15120

Product Differentiation: Each firm makes a product that is slightly different from the products of competing firmsClose substitutes but not perfect substitutesAn attempt to ↑ price will normally results in a ↓ in

volume sold

Competition on Quality, Price, and MarketingQuality in design, reliability, service provided to

buyer and ease of access to productThe firm faces a downward sloping demand curveFirm must market intensively: promotions,

distribution, packaging, etc.

Monopolistic Competitors

Page 148-15121

Product differentiation does not necessarily mean there are any physical differences among productsThey might all be the same, but how they are

sold may make all the difference

Monopolistic Competitors

Page 148-15122

The monopolistic competitor tries to set his/her product apart from the competitionMain method is via advertisingWhen this is done successfully, the demand curve

becomes more vertical or inelastic Buyers are willing to pay more because they believe it is

much better than their other choices

Basis for product differentiationPhysical differences ConvenienceAmbience ReputationAppeals to vanity Snob appeal

Monopolistic Competitors

Page 148-15123

Typical Monopolistic CompetitorTries to set firm apart from competition

New Product Development and Innovation Advertising

oCreate consumer perception of product differentiation – real or imagined

oAttempt to keep demand as inelastic as possibleSelling costs can be extremely high

Monopolistic CompetitorsShort run profits can exist but long

run profits are reduced to 0 with industry entrants

Fast food industry is a good example All services basically the same Extensive use of marketing to

differentiate products/services across firms

Striving to produce more products and services Page 148-15124

Monopolistic CompetitorsHow much of the product does this

firm produce? Determine output level where MC = MR (Why does this make sense?)

What price should the firm charge for this product? Locate on the downward sloping

demand curve where above quantity intersects

Associated price on this demand curve

Page 148-15125

Page 15026

The firm produces QSR where MR=MC at E Prices its products at PSR by reading off the demand

curve at quantity QSR

Represents consumer’s willingness to pay for QSR

Short run profits exist if: PSR > ATCSR at QSR

Short run profits exist if: PSR > ATCSR at QSR

Monopolistic Competitors$/unit

Q

MC

ATC

QSR

PSR

ATCSR

MR

Firm Demand

Profits

E

Page 15027

Monopolistic Competitors$/unit

Q

MC

ATC

QSR

PSR

ATCSR

MR

Firm Demand

Loss

E

Short run loss At QSR, PSR < ATCSR

Page 15028

Monopolistic Competitors$/unit

Q

MCATC

QLR

ATCLR = PLR

MR

Firm DemandE

In the Long Run (LR)Profits are bid away as more firms enter the market Losses will no longer exist as firms leave the market

At QLR the remaining firms are just breaking even

In the Long Run (LR)Profits are bid away as more firms enter the market Losses will no longer exist as firms leave the market

At QLR the remaining firms are just breaking even

Monopolistic Competitors

Page 148-15129

How much is the industry dominated or not dominated by few suppliersDepends on the geographical scope –

national, regional, global An industry can be almost perfectly competitive

on a national scope, but almost a monopoly locally e.g. local farm supply cooperative

Depends on the existence of barriers to entry and exit Industries may appear concentrated but few

barriers exist to prevent entry which implies less ability to dominate market

OligopoliesA few number of sellers

Each can impact market price and quantities

Interdependent in their decision making A firm will consider how other firms will

react to pricing, promotional and other actions

Key component in marketing strategies and pricing behavior

Pages 152-15530

Rival oligopolists will match price cuts but not price increases in the short run as they want to capture larger market share

If there are differences in prices they are the result of successful product differentiation

Non-price competition between oligopolists used to uniquely identify products

Tend to have stable prices Changes in production and other costs not easily

passed on and may have to be absorbed

Pages 152-15531

Oligopolies

OligopoliesPrice leadership strategy

A particular firm dominates the market Controls the largest share of the market Other industry firms more efficient in operation,

marketing, etc. The dominant firm first sets its price to

maximize profit Remaining firms set their prices based on the

dominant firms pricing

The price set by the oligopolist seller is higher then under perfect competition Quantity produced is lower then perfect comp.

Pages 152-15532

OligopoliesThe dominant firm may be efficient

enough to set a lower price Eventually drive the other firms out of

the market

Pages 152-15533

Oligopolies

Examples of Oligopolies Auto manufacturers

2007 CR4 value of 73.7 Aircraft manufacturing

2007 CR4 value of 81.3 Farm machinery and equipment

John Deere, J.I.Case and New Holland 80% of 2-wheel drive tractors close to 90% of combines sold in the U.S.

Cattle slaughtering CR4 value increased from 39 to 67 over the

1985-1995 period 2007 CR4 value of 59.4

Pages 152-15534

Oligopolies

Pages 152-15535

D

D

d

d

Demand curve DD All oligopolists move prices

together and share market

Demand curve DD All oligopolists move prices

together and share market Original demand curve dd

A single firm changes its price

Curve DD is more inelastic

Below point A, other firms match price cut

This leads to a kinked demand curve dAD

Leads to a discontinuous marginal revenue curve, dBCE

Original demand curve ddA single firm changes

its price Curve DD is more

inelasticBelow point A, other

firms match price cutThis leads to a kinked

demand curve dAD Leads to a

discontinuous marginal revenue curve, dBCE

A

B

C

E

Remember oligopolists account for the reaction of other firms so there is no single demand curve

Remember oligopolists account for the reaction of other firms so there is no single demand curve

Oligopolies

Pages 152-15536

D

D

dA

B

C

E

Meeting demand along the lower segment of the kinked demand curve → the firm is maintaining its market share

Meeting demand along the lower segment of the kinked demand curve → the firm is maintaining its market share

MC

Oligopolies

Pages 152-15537

D

D

dA

B

C

E

MC

MC*

Shifting MC curve to MC* reflecting technological advances will not affect PE and QE

It does impact profits as MC drops

Shifting MC curve to MC* reflecting technological advances will not affect PE and QE

It does impact profits as MC drops

PE

QE

MonopoliesOne seller in the market

Firm and market demand curve are the same

Entry of other firms restricted by patents, etc. (i.e., barrier to entry)

Firm has absolute power over setting market price

Produces a unique productIt can have economic profits in the

long run because it can set price without competition

Page 155-15638

Monopolies

Page 155-15639

MC ATCAVC

Demand= ARMR

TVC

0

N

M

PEC

B

A

QE

Total revenue = area 0PECQE

Monopolist produces quantity where MC=MR (pt A), QE

Uses the demand curve (pt C) when setting price PE

Total revenue = area 0PECQE

Monopolist produces quantity where MC=MR (pt A), QE

Uses the demand curve (pt C) when setting price PE

$/unit

Quantity

Monopolies

Page 155-15640

MC ATCAVC

Demand= ARMR

TVC

0

N

M

PEC

B

A

QE

$/unit

Quantity

Total variable costs for the monopolist is equal to area 0NAQE, (green box) =AVC x QE

= 0N x QE

Total variable costs for the monopolist is equal to area 0NAQE, (green box) =AVC x QE

= 0N x QE

Monopolies

Page 155-15641

MC ATCAVC

Demand= ARMR

TFC

0

N

M

PEC

B

A

QE

$/unit

Quantity

Total fixed costs equals NMBA (orange box)=(ATC-AVC) x QE

Total fixed costs equals NMBA (orange box)=(ATC-AVC) x QE

Monopolies

Page 155-15642

MC ATCAVC

Demand= ARMR

TFC

TVC

0

N

M

PEC

B

A

QE

$/unit

Quantity

Total cost is area 0MBQE (green box + orange box)

= area ONAQE + area NMBA

Total cost is area 0MBQE (green box + orange box)

= area ONAQE + area NMBA

Monopolies

Page 155-15643

MC ATCAVC

Demand= ARMR

TFC

TVC

0

N

M

PE

EconomicProfit

C

B

A

QE

$/unit

Quantity

Monopoly economic profit = area MPECB = Total Revenue (yellow

box) – Total Costs (green box + orange box)

Monopoly economic profit = area MPECB = Total Revenue (yellow

box) – Total Costs (green box + orange box)

Monopolies

Page 155-15644

MC ATCAVC

Demand= ARMR

TFC

TVC

0

N

M

PE

EconomicProfit

C

B

A

QE

$/unit

Quantity

Total fixed costs equals NMBA (orange box)=(ATC-AVC) x QE

Total fixed costs equals NMBA (orange box)=(ATC-AVC) x QE

Comparison of Structure Results

Lets compare the results we have obtained from the alternative market structures

45

Perfect Competition

Page 15746

Demand

0QPC

$/unit

QuantityMR

1

23

45

6

7

89

Supply

Consumer surplus = sum of areas 1, 4, 5, 8 and 9 (Pink triangle)

Consumer surplus = sum of areas 1, 4, 5, 8 and 9 (Pink triangle)Producer surplus = sum of areas 2, 3, 6 and 7 (green triangle)

Producer surplus = sum of areas 2, 3, 6 and 7 (green triangle)

Total economic surplus = sum of blue and green triangles = sum of areas 1 – 9

Total economic surplus = sum of blue and green triangles = sum of areas 1 – 9

PPC

Monopoly Case

Page 15747

Demand

0QM

$/unit

QuantityMR

23

45

6

7

89

Supply

Consumer surplus = sum of areas 8 and 9 (Pink triangle)

Consumer surplus = sum of areas 8 and 9 (Pink triangle)

1

Compared to P.C., consumers would be economically worse-off by areas 1, 4 and 5

Paying a higher price, PM Purchasing a smaller quantity, QM

PPC

PM

QPC

Monopoly Case

Page 15748

Demand

0QM

$/unit

QuantityMR

23

45

6

7

89

Supply

1PPC

PM

QPC

PS = to sum of areas 3, 4, 5, 6 and 7 (green area)

Compared to P.C. producers lose area 2 but gain areas 4 + 5 Producers economically better-off

than perfect competition

Monopoly Case

Page 15749

Demand

0QM

$/unit

QuantityMR

2

Supply

1PPC

PM

QPC

Purple triangle is total economic surplus under perfect competition

Orange triangle is total economic surplus under monopoly

Society as a whole economically worse-off by areas 1 + 2 (Green triangle) Known as the dead weight loss Reflects the fact that less resources in

this market are used to provide products to consumers

Summary of Impacts of Alternative Market Structures from a Selling Perspective

Summary of Impacts of Alternative Market Structures from a Selling Perspective

Page 15750

Imperfect Competition From the Buying Perspective

51

Types of Imperfect Competitors on the Buying Side

Monopsonistic competitionOligopsonyMonopsony

Let’s start here…Let’s start here…

52

Monopsonies

Single buyer in the input marketFocus is on the marginal input cost

of purchasing additional amounts of an input

If the objective of the buying firm is to maximize profit, what is the decision rule as to how much of an input should be purchased?

Page 158-16053

Monopsonies

General Profit maximizing input use rule for any firm type: To maximize profit the firm should

continue to purchase additional units of an input so long as the extra revenue generated by the additional input use is greater than the additional cost associated with that additional input use So long as ∆Revenue > ∆Cost when

purchasing additional units

Page 158-16054

MonopsoniesUnder perfect competition, the firm views

its input supply curve as a horizontal lineFirm can purchase as much as desired as the

going priceFirm’s purchases do not impact input’s price

Page 158-16055

Labor

WageRate

$12.50

Supply curve faced by a P.C. firm

L1 L1

MonopsoniesMonopsonist must consider the

marginal input cost (MIC) when purchasing inputs MIC: Extra cost associated with

purchasing an additional unit of input

Monopsonist must pay higher prices per unit if he/she wants to purchase greater amounts of the input→MIC curve is above the input supply

curve

Page 158-16056

MonopsoniesMonopsonist is the only input buyer

→Faces an upward sloping input supply curve

Input purchasing decisions impact input prices

Page 158-16057

Labor

WageRate

$12.50

Supply curve faced by a monopsonist

L1

$15.75

L2

Marginal Input Cost

Page 158-160

Units of Variable Input

Price/Unit ($)

Total Input Cost

Marginal Input Cost

1 3.00 3.00 -----

2 3.50 7.00 4.00

3 4.00 12.00 5.00

4 4.50 18.00 6.00

5 5.00 25.00 7.00

6 5.50 33.00 8.00

7 6.00 42.00 9.00

8 6.50 52.00 10.00

9 7.00 63.00 11.00

10 7.5 75.00 12.0058

Marginal Input Cost

Page 158-160

1 2 3 4 5 6

1

3

2

4

5

6

7

8

9

10

11

$/U

nit

7 8 9 10

Quantity/unit of time

Marginal Input Cost

Input Supply Curve

Data obtained from previous table

Data obtained from previous table

59

MonopsoniesProfit maximizing monopsonist

Use variable input to the point where Marginal Input Cost (MIC) =Marginal Revenue Product (MRP)

MRP: Addition to total revenue attributed to use of one more unit of variable input MRP = Marginal Revenue (MR) x MPP = (∆Revenue/∆Output) x (∆Output/∆Input)

= ∆Revenue/∆Input = MVP when MR = P

MIC: Extra cost associated with purchasing an additional unit of input

Page 158-16060

Monopsonies So long as MRP > MIC profits will

increase with increased input use

If MRP < MIC, profits will ↑ by reducing the amount of input used Why will this occur?

Page 158-16061

Monopsonies

Page 158-16062

MIC

Input SupplyMonopsony

Input Quantity

$

QM

CM

P.C. in output market MRP = MVP under P.C. MVP=P x MPP Profit Max. →MVP = MIC

P.C. in output market MRP = MVP under P.C. MVP=P x MPP Profit Max. →MVP = MIC

MRP With monopsony, MIC > CM

CM = input cost/unit under monopsonyCP.C. = input cost/unit under P.C. input market

MIC = MVP

Input SupplyP.C.CP.C.

QP.C.

Monopsonies

Page 158-16063

MIC

Input SupplyM

Input Quantity

$

QM

CM

MRP

Input SupplyP.C.CP.C.

QP.C.

Resource use Higher Price paid under P.C., CP.C.

Utilization higher under P.C., QP.C.

Price difference referred to as monopsonistic exploitation

(i.e., CP.C. – CM)

Imperfect Competition on Both Sides

Page 160

Product Selling Perspective

Input Purchasing Perspective

Perfect Competition

Perfect Competition

Monopolistic Competition

Monopsonistic Competition

Oligopoly Oligopsony

Monopoly Monopsony

Can have any combination of the above for a particular firm Lets look at profit maximization under specific cases

64

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward

© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights Reserved.Page 16165

Page 16166

MIC

InputSupplyM

Input Quantity

$

QMM

CMM

MRP

Case #1: Monopsonist in input purchasing and Monopolist seller of product Equilibrium: MRP = MIC at Point A Pricing off input supply curve gives QMM and CMM

Case #1: Monopsonist in input purchasing and Monopolist seller of product Equilibrium: MRP = MIC at Point A Pricing off input supply curve gives QMM and CMM

MVP

A

Use MR not output price (PY) due to being a monopolist (i.e., single seller of output) MRP = MR*MPP

I don’t display the MVP curve as not relevant for monopolist

Page 16167

Input SupplyPC

Input Quantity

$

QPCM

CPCM

MRPMVP

C

Case #2: Perfect Competition in input purchasing and Monopoly seller Equilibrium is where MRP=Supply at C No Marginal InputCost curve → QPCM and PPCM

Case #2: Perfect Competition in input purchasing and Monopoly seller Equilibrium is where MRP=Supply at C No Marginal InputCost curve → QPCM and PPCM

Input price determined by input market Take input price as given

Page 16168

MIC

InputSupplyM

Input Quantity

$

QMPC

CMPC D

Case #3: Monopsony in input purchasing and Perfectly Competitive sellerEquilibrium: MVP=MIC at Point EPricing off supply curve → QMPC and PMPC at point D

Case #3: Monopsony in input purchasing and Perfectly Competitive sellerEquilibrium: MVP=MIC at Point EPricing off supply curve → QMPC and PMPC at point D

E

We use MVP instead of MRP curve given P.C. seller

MVP = PY x MPP

Page 16169

Input SupplyPC

Input Quantity

$

QPC

CPC

F

Case #4: Perfect Competition in both input purchasing and product salesEquilibrium: MVP=Supply at Point F→ QPC and PPC

Case #4: Perfect Competition in both input purchasing and product salesEquilibrium: MVP=Supply at Point F→ QPC and PPC

Input price determinedby input market

MVP = PY x MPPWe use MVP instead of MRP curve given P.C. seller

Monopsonistic Competitors

Many firms buying resources Ability to differentiate services to

producersDifferentiated services includes

distribution convenience and location of facilities, willingness to provide credit or technical assistance

P and Q determined same as monopsonist

Page 16170

Oligopsonies

A few number of buyers of a resourceProfit earned will depend on elasticity

of supply for resource (less elastic than monopsonistic competition)

Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate

P and Q determined same as monopsonist

Page 16171

Governmental Regulation

Various approaches have been used to counteract adverse effects of imperfect competition in the marketplace Legislative acts passed by Congress, including

the Sherman Antitrust and Clayton Acts Price ceilings Lump-sum Tax Minimum price or floors

Page 16272

Legislative Acts

Sherman Antitrust Act of 1890 Prohibited monopoly and other restrictive

business practicesPackers and Stockyards Act of 1921

Reinforced anit-trust laws regarding livestock marketing

Capper-Volstead Act of 1922 Exempted cooperatives from anti-trust laws

Robinson-Patman Act Prohibited price discrimination practices

Agricultural Marketing Agreement ActEstablished agricultural marketing orders

Page 16373

Impacts of Price CeilingsRegulatory agencies such as the Federal

Trade Commission can impact monopoly effects by instituting a maximum (ceiling) price FTC charged with investigating business

organizations and practices and carrying out anti-trust provisions

How can we model the impact of price ceilings?

Page 16374

Page 16575

MCATC

DemandMR

0

A

PM

B

C

QM

$/unit

Quantity

Implications of a Price CeilingImplications of a Price Ceiling

D

Without regulatory involvement the monopolist will Equate MR and MC

(pt C)Produce QM and

charge price PM Total Revenue =

0PMBQM

Total Cost = 0ADQM

Earn a profit of APMBD

Without regulatory involvement the monopolist will Equate MR and MC

(pt C)Produce QM and

charge price PM Total Revenue =

0PMBQM

Total Cost = 0ADQM

Earn a profit of APMBD

Impacts of Price Ceilings

Page 16576

MCATC

Demand

0

PM

B

C

QM

$/unit

Quantity

Implications of a Price CeilingImplications of a Price Ceiling

Impacts of Price CeilingsWith gov’t imposed

price ceiling, PMAX

The demand curve is given by PMAXEH

MR is PMAXEFG Monoopolist

produces more (Q1

> QM) at a lower price (PMAX < PM)

With gov’t imposed price ceiling, PMAX

The demand curve is given by PMAXEH

MR is PMAXEFG Monoopolist

produces more (Q1

> QM) at a lower price (PMAX < PM)

PMAX

E

F

G H

Q1

IJ

Monopolist’s profit falls to area JPMAXEI (turquoise box)

Monopolist’s profit falls to area JPMAXEI (turquoise box)

Impacts of a Lump Sum Tax

A regulatory agencies can impact the level of monopoly profits by assessing a lump-sum tax May be a license fee or one-time charge This is a fixed tax regardless of output level

How can we model the impact of a lump sum tax?

Page 16577

Page 16578

MC

ATC

DemandMR

0

A

PMB

C

QM

$/unit

Quantity

Implications of a Lump Sum TaxImplications of a Lump Sum Tax

D

Impacts of a Lump Sum TaxThe monopolist equates

MC=MR (pt. C)Produces QM Charges PM

Profit of APMBD

The monopolist equates MC=MR (pt. C)Produces QM Charges PM

Profit of APMBDATC*

Lump-sum tax↑ firm’s ATC to ATC*

↓ producer surplus from APMBD to EPMBT

Does not change output level or price

Lump-sum tax↑ firm’s ATC to ATC*

↓ producer surplus from APMBD to EPMBT

Does not change output level or price

E T

Per Unit Tax

Loss in PS surplus is area AETD (pink box)Loss in PS surplus is area AETD (pink box)

Impacts of a Minimum Price

In a monopsony, the gov’t could regulate the price of a resource by imposing a minimum price that must be paid for that resource A good example is the minimum wage laws

How can we model the impact of a minimum price policy on how much of the input may be purchased?

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MIC

Input Supply

Input Quantity

$

QM

CM

MRP

Impacts of a Minimum PriceNo minimum price Monopsonist determines

where MRP=MIC Employ QM input units Pays $CM/unit

No minimum price Monopsonist determines

where MRP=MIC Employ QM input units Pays $CM/unit

Implications of a Minimum PriceImplications of a Minimum Price

Minimum price, CF, imposed Monopsonist’s MIC curve

would be CFDEBThe firm would use more

input, QM → QF

Minimum price, CF, imposed Monopsonist’s MIC curve

would be CFDEBThe firm would use more

input, QM → QF

CFD

E

F

QF

SummaryUnlike perfect competition, imperfect

competitors have ability to influence priceMonopolistic competitors try to differentiate

their productMonopolists are the only seller in their

product market. Monopsonists are the only buyer

Oligopolies are a few number of sellers while oligopsonies are a few number of buyers.

What are the economic welfare implications of imperfect competition?

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Chapter 10 focuses on natural resource use in agriculture and the impacts on the environment

82