微观经济学（第八版-英文）课件：Market Power Monopoly and Monopsony

10.1

Monopoly10.2

MonopolyPower10.3

SourcesofMonopolyPower10.4

TheSocialCostsofMonopolyPower10.5

Monopsony10.6

MonopsonyPower10.7 LimitingMarketPower:

TheAntitrustLaws

MarketPower:MonopolyandMonopsonyCHAPTEROUTLINE●monopolyMarketwithonlyoneseller.●monopsonyMarketwithonlyonebuyer.●

marketpowerAbilityofasellerorbuyertoaffectthepriceofagood.Monopoly10.1AverageRevenueandMarginalRevenue●

marginalrevenueChangeinrevenueresultingfromaone-unitincreaseinoutput.TABLE10.1

TOTAL,MARGINAL,ANDAVERAGEREVENUEPRICE(P)QUANTITY(Q)TOTALREVENUE(R)MARGINALREVENUE(MR)AVERAGEREVENUE(AR)$60$0——515$5$542834339132481215531Considerafirmfacingthefollowingdemandcurve:P=6

QAverageandmarginalrevenueareshownforthedemandcurve

P=6−Q.AVERAGEANDMARGINALREVENUEFIGURE10.1PROFITISMAXIMIZEDWHENMARGINALREVENUEEQUALSMARGINALCOSTFIGURE10.2TheMonopolist’sOutputDecisionQ*istheoutputlevelatwhichMR=MC.Ifthefirmproducesasmalleroutput—say,Q1—itsacrificessomeprofitbecausetheextrarevenuethatcouldbeearnedfromproducingandsellingtheunitsbetweenQ1andQ*exceedsthecostofproducingthem.Similarly,expandingoutputfromQ*toQ2wouldreduceprofitbecausetheadditionalcostwouldexceedtheadditionalrevenue.WecanalsoseealgebraicallythatQ*maximizesprofit.Profitπisthedifferencebetweenrevenueandcost,bothofwhichdependonQ:AsQisincreasedfromzero,profitwillincreaseuntilitreachesamaximumandthenbegintodecrease.Thustheprofit-maximizingQissuchthattheincrementalprofitresultingfromasmallincreaseinQisjustzero(i.e.,Δπ/ΔQ=0).ThenButΔR/ΔQismarginalrevenueandΔC/ΔQismarginalcost.Thustheprofit-maximizingconditionisthat

EXAMPLEOFPROFITMAXIMIZATIONFIGURE10.3AnExamplePart(a)showstotalrevenueR,totalcostC,andprofit,thedifferencebetweenthetwo.Part(b)showsaverageandmarginalrevenueandaverageandmarginalcost.Marginalrevenueistheslopeofthetotalrevenuecurve,andmarginalcostistheslopeofthetotalcostcurve.Theprofit-maximizingoutputisQ*=10,thepointwheremarginalrevenueequalsmarginalcost.Atthisoutputlevel,theslopeoftheprofitcurveiszero,andtheslopesofthetotalrevenueandtotalcostcurvesareequal.Theprofitperunitis$15,thedifferencebetweenaveragerevenueandaveragecost.Because10unitsareproduced,totalprofitis$150.

ARuleofThumbforPricingNotethattheextrarevenuefromanincrementalunitofquantity,Δ(PQ)/ΔQ,hastwocomponents:1.ProducingoneextraunitandsellingitatpricePbringsinrevenue(1)(P)=P.2.Butbecausethefirmfacesadownward-slopingdemandcurve,producingandsellingthisextraunitalsoresultsinasmalldropinpriceΔP/ΔQ,whichreducestherevenuefromallunitssold(i.e.,achangeinrevenueQ[ΔP/ΔQ]).Thus,

Withlimitedknowledgeofaverageandmarginalrevenue,wecanderivearuleofthumpthatcanbemoreeasilyappliedinpractice.First,writetheexpressionformarginalrevenue:(Q/P)(ΔP/ΔQ)isthereciprocaloftheelasticityofdemand,1/Ed,measuredattheprofit-maximizingoutput,andNow,becausethefirm’sobjectiveistomaximizeprofit,wecansetmarginalrevenueequaltomarginalcost:whichcanberearrangedtogiveusEquivalently,wecanrearrangethisequationtoexpresspricedirectlyasamarkupovermarginalcost:

(10.1)

(10.2)

EXAMPLE10.1ASTRA-MERCKPRICESPRILOSECIn1995,Prilosec,representedanewgenerationof

antiulcermedication.Prilosecwasbasedonavery

differentbiochemicalmechanismandwasmuch

moreeffectivethanearlierdrugs.

By1996,ithadbecomethebest-sellingdrugin

theworldandfacednomajorcompetitor.Astra-MerckwaspricingPrilosecatabout$3.50perdailydose.ThemarginalcostofproducingandpackagingPrilosecisonlyabout30to40centsperdailydose.Thepriceelasticityofdemand,ED,shouldbeintherangeofroughly−1.0to−1.2.Settingthepriceatamarkupexceeding400percentovermarginalcostisconsistentwithourruleofthumbforpricing.ShiftsinDemandAmonopolisticmarkethasnosupplycurve.Inotherwords,thereisnoone-to-onerelationshipbetweenpriceandthequantityproduced.Thereasonisthatthemonopolist’soutputdecisiondependsnotonlyonmarginalcostbutalsoontheshapeofthedemandcurve.Asaresult,shiftsindemanddonottraceouttheseriesofpricesandquantitiesthatcorrespondtoacompetitivesupplycurve.Instead,shiftsindemandcanleadtochangesinpricewithnochangeinoutput,changesinoutputwithnochangeinprice,orchangesinbothpriceandoutput.Shiftsindemandusuallycausechangesinbothpriceandquantity.Acompetitiveindustrysuppliesaspecificquantityateveryprice.Nosuchrelationshipexistsforamonopolist,which,dependingonhowdemandshifts,mightsupplyseveraldifferentquantitiesatthesameprice,orthesamequantityatdifferentprices.SHIFTSINDEMANDFIGURE10.4Shiftingthedemandcurveshowsthatamonopolisticmarkethasnosupplycurve—i.e.,thereisnoone-to-onerelationshipbetweenpriceandquantityproduced.In(a),thedemandcurveD1shiftstonewdemandcurveD2.ButthenewmarginalrevenuecurveMR2intersectsmarginalcostatthesamepointastheoldmarginalrevenuecurveMR1.Theprofit-maximizingoutputthereforeremainsthesame,althoughpricefallsfromP1toP2.In(b),thenewmarginalrevenuecurveMR2intersectsmarginalcostatahigheroutputlevelQ2.Butbecausedemandisnowmoreelastic,priceremainsthesame.TheEffectofaTaxEFFECTOFEXCISETAXONMONOPOLISTFIGURE10.5Withataxtperunit,thefirm’seffectivemarginalcostisincreasedbytheamountt

toMC+t.Inthisexample,theincreaseinpriceΔPislargerthanthetaxt.Supposeaspecifictaxoftdollarsperunitislevied,sothatthe

monopolistmustremittdollarstothegovernmentforeveryunititsells.IfMCwasthefirm’soriginalmarginalcost,itsoptimalproductiondecisionisnowgivenby

TheMultiplantFirmSupposeafirmhastwoplants.Whatshoulditstotaloutputbe,andhowmuchofthatoutputshouldeachplantproduce?Wecanfindtheanswerintuitivelyintwosteps.●

Step1.Whateverthetotaloutput,itshouldbedividedbetweenthetwoplantssothatmarginalcostisthesameineachplant.Otherwise,thefirmcouldreduceitscostsandincreaseitsprofitbyreallocatingproduction.●

Step2.Weknowthattotaloutputmustbesuchthatmarginalrevenueequalsmarginalcost.Otherwise,thefirmcouldincreaseitsprofitbyraisingorloweringtotaloutput.Wecanalsoderivethisresultalgebraically.LetQ1andC1betheoutputandcostofproductionforPlant1,Q2andC2betheoutputandcostofproductionforPlant2,andQT=Q1+Q2betotaloutput.ThenprofitisThefirmshouldincreaseoutputfromeachplantuntiltheincrementalprofitfromthelastunitproducediszero.StartbysettingincrementalprofitfromoutputatPlant1tozero:HereΔ(PQT)/ΔQ1istherevenuefromproducingandsellingonemoreunit—i.e.,marginalrevenue,MR,forallofthefirm’soutput.

Thenextterm,ΔC1/ΔQ1,ismarginalcostatPlant1,MC1.Wethushave

MR−MC1=0,orSimilarly,wecansetincrementalprofitfromoutputatPlant2tozero,Puttingtheserelationstogether,weseethatthefirmshouldproducesothat

(10.3)

PRODUCINGWITHTWOPLANTSFIGURE10.6AfirmwithtwoplantsmaximizesprofitsbychoosingoutputlevelsQ1andQ2sothatmarginalrevenueMR(whichdependsontotaloutput)equalsmarginalcostsforeachplant,MC1andMC2.THEDEMANDFORTOOTHBRUSHESFIGURE10.7MonopolyPower10.2Part(a)showsthemarketdemandfortoothbrushes.Part(b)showsthedemandfortoothbrushesasseenbyFirmA.Atamarketpriceof$1.50,elasticityofmarketdemandis−1.5.FirmA,however,seesamuchmoreelasticdemandcurveDAbecauseofcompetitionfromotherfirms.Atapriceof$1.50,FirmA’sdemandelasticityis−6.Still,FirmAhassomemonopolypower:Itsprofit-maximizingpriceis$1.50,whichexceedsmarginalcost.EXAMPLE10.2ELASTICITIESOFDEMANDFORSOFTDRINKSSoftdrinksprovideagoodexampleofthedifferencebetweenamarketelasticityofdemandandafirm’selasticityofdemand.Inaddition,softdrinksareimportantbecausetheirconsumptionhasbeenlinkedtochildhoodobesity;therecouldbehealthbenefitsfromtaxingthem.Arecentreviewofseveralstatisticalstudiesfoundthatthemarketelasticityofdemandforsoftdrinksisbetween−0.8and−1.0.6Thatmeansthatifallsoftdrinkproducersincreasedthepricesofalloftheirbrandsby1percent,thequantityofsoftdrinksdemandedwouldfallby0.8to1.0percent.Thedemandforanyindividualsoftdrink,however,willbemuchmoreelastic,becauseconsumerscanreadilysubstituteonedrinkforanother.Althoughelasticitieswilldifferacrossdifferentbrands,studieshaveshownthattheelasticityofdemandfor,say,CocaColaisaround−5.7Inotherwords,ifthepriceofCokewereincreasedby1percentbutthepricesofallothersoftdrinksremainedunchanged,thequantityofCokedemandedwouldfallbyabout5percent.Students—andbusinesspeople—sometimesconfusethemarketelasticityofdemandwiththefirm(orbrand)elasticityofdemand.Makesureyouunderstandthedifference.Production,Price,andMonopolyPowerInfigure10.7,althoughFirmAisnotapuremonopolist,itdoeshave

monopolypower—itcanprofitablychargeapricegreaterthanmarginalcost.

Ofcourse,itsmonopolypowerislessthanitwouldbeifithaddrivenawaythecompetitionandmonopolizedthemarket,butitmightstillbesubstantial.Thisraisestwoquestions.

Howcanwemeasuremonopolypowerinordertocompareonefirmwithanother?(Sofarwehavebeentalkingaboutmonopolypoweronlyinqualitativeterms.)2.

Whatarethesourcesofmonopolypower,andwhydosomefirmshavemoremonopolypowerthanothers?Weaddressboththesequestionsbelow,althoughamorecompleteanswertothesecondquestionwillbeprovidedinChapters12and13.MeasuringMonopolyPowerRemembertheimportantdistinctionbetweenaperfectlycompetitivefirmandafirmwithmonopolypower:Forthecompetitivefirm,priceequalsmarginalcost;forthefirmwithmonopolypower,priceexceedsmarginalcost.●

LernerIndexofMonopolyPowerMeasureofmonopolypowercalculatedasexcessofpriceovermarginalcostasafractionofprice.Mathematically:Thisindexofmonopolypowercanalsobeexpressedintermsoftheelasticityofdemandfacingthefirm.

(10.4)

ELASTICITYOFDEMANDANDPRICEMARKUPFIGURE10.8TheRuleofThumbforPricingThemarkup(P−MC)/Pisequaltominustheinverseoftheelasticityofdemand.Ifthefirm’sdemandiselastic,asin(a),themarkupissmallandthefirmhaslittlemonopolypower.Theoppositeistrueifdemandisrelativelyinelastic,asin(b).

EXAMPLE10.3MARKUPPRICING:SUPERMARKETSTODESIGNERJEANSAlthoughtheelasticityofmarketdemandforfoodis

small(about−1),nosinglesupermarketcanraiseits

pricesverymuchwithoutlosingcustomerstoother

stores.Theelasticityofdemandforanyonesupermarketis

oftenaslargeas−10.WefindP=MC/(1−0.1)=

MC/(0.9)=(1.11)MC.Themanagerofatypicalsupermarketshouldsetpricesabout11percentabovemarginalcost.Smallconveniencestorestypicallychargehigherpricesbecauseitscustomersaregenerallylesspricesensitive.Becausetheelasticityofdemandforaconveniencestoreisabout−5,themarkupequationimpliesthatitspricesshouldbeabout25percentabovemarginalcost.Withdesignerjeans,demandelasticitiesintherangeof−2to−3aretypical.Thismeansthatpriceshouldbe50to100percenthigherthanmarginalcost.EXAMPLE10.4THEPRICINGOFVIDEOSWhenthemarketforvideoswasyoung,producershadnogoodestimatesoftheelasticityofdemand.Asthemarketmatured,however,salesdataandmarketresearchstudiesputpricingdecisionsonfirmerground.Bythe1990s,mostproducershadloweredpricesacrosstheboard.TABLE10.2RETAILPRICESOFVIDEOSIN1985AND201119852011TITLERETAILPRICE($)TITLERETAILPRICE($)VHSDVDPurpleRain$29.98Tangled$20.60RaidersoftheLostArk$24.95HarryPotterandtheDeathlyHallows,Part1$20.58JaneFondaWorkout$59.95Megamind$18.74TheEmpireStrikesBack$79.98DespicableMe$14.99AnOfficerandaGentleman$24.95Red$27.14StarTrek:TheMotionPicture$24.95TheKing’sSpeech$14.99StarWars$39.98Secretariat$20.60VIDEOSALESFIGURE10.9Between1990and1998,lowerpricesinducedconsumerstobuymanymorevideos.By2001,salesofDVDsovertooksalesofVHSvideocassettes.High-definitionDVDswereintroducedin2006,andareexpectedtodisplacesalesofconventionalDVDs.AllDVDs,however,arenowbeingdisplacedbystreamingvideo.EXAMPLE10.4THEPRICINGOFVIDEOSSourcesofMonopolyPower10.3Asequation(10.4)shows,thelesselasticitsdemandcurve,themoremonopolypowerafirmhas.Theultimatedeterminantofmonopolypoweristhereforethefirm’selasticityofdemand.Threefactorsdetermineafirm’selasticityofdemand.1.Theelasticityofmarketdemand.Becausethefirm’sowndemandwillbeatleastaselasticasmarketdemand,theelasticityofmarketdemandlimitsthepotentialformonopolypower.2.Thenumberoffirmsinthemarket.Iftherearemanyfirms,itisunlikelythatanyonefirmwillbeabletoaffectpricesignificantly.3.Theinteractionamongfirms.Evenifonlytwoorthreefirmsareinthemarket,eachfirmwillbeunabletoprofitablyraisepriceverymuchiftherivalryamongthemisaggressive,witheachfirmtryingtocaptureasmuchofthemarketasitcan.Ifthereisonlyonefirm—apuremonopolist—itsdemandcurveisthemarketdemandcurve.Inthiscase,thefirm’sdegreeofmonopolypowerdependscompletelyontheelasticityofmarketdemand.Whenseveralfirmscompetewithoneanother,theelasticityofmarketdemandsetsalowerlimitonthemagnitudeoftheelasticityofdemandforeachfirm.Aparticularfirm’selasticitydependsonhowthefirmscompetewithoneanother,andtheelasticityofmarketdemandlimitsthepotentialmonopolypowerofindividualproducers.Becausethedemandforoilisfairlyinelastic(atleastintheshortrun),OPECcouldraiseoilpricesfarabovemarginalproductioncostduringthe1970sandearly1980s.Becausethedemandsforsuchcommoditiesascoffee,cocoa,tin,andcopperaremuchmoreelastic,attemptsbyproducerstocartelizethesemarketsandraisepriceshavelargelyfailed.Ineachcase,theelasticityofmarketdemandlimitsthepotentialmonopolypowerofindividualproducers.TheElasticityofMarketDemandTheNumberofFirmsOtherthingsbeingequal,themonopolypowerofeachfirmwillfallasthenumberoffirmsincreases.Whenonlyafewfirmsaccountformostofthesalesinamarket,wesaythatthemarketishighlyconcentrated.●barriertoentryConditionthatimpedesentrybynewcompetitors.Sometimestherearenaturalbarrierstoentry:Patents,copyrights,andlicensesEconomiesofscalemaymakeittoocostlyformorethanafewfirmstosupplytheentiremarket.Insomecases,economiesofscalemaybesolargethatitismostefficientforasinglefirm—anaturalmonopoly—tosupplytheentiremarket.TheInteractionAmongFirmsFirmsmightcompeteaggressively,undercuttingoneanother’spricestocapturemoremarketshare,ortheymightnotcompetemuch.Theymightevencollude(inviolationoftheantitrustlaws),agreeingtolimitoutputandraiseprices.Otherthingsbeingequal,monopolypowerissmallerwhenfirmscompeteaggressivelyandislargerwhentheycooperate.Becauseraisingpricesinconcertratherthanindividuallyismorelikelytobeprofitable,collusioncangeneratesubstantialmonopolypower.Rememberthatafirm’smonopolypoweroftenchangesovertime,asitsoperatingconditions(marketdemandandcost),itsbehavior,andthebehaviorofitscompetitorschange.Monopolypowermustthereforebethoughtofinadynamiccontext.Furthermore,realorpotentialmonopolypowerintheshortruncanmakeanindustrymorecompetitiveinthelongrun:Largeshort-runprofitscaninducenewfirmstoenteranindustry,therebyreducingmonopolypoweroverthelongerterm.TheSocialCostsofMonopolyPower10.4DEADWEIGHTLOSSFROMMONOPOLYPOWERFIGURE10.10Theshadedrectangleandtrianglesshowchangesinconsumerandproducersurpluswhenmovingfromcompetitivepriceandquantity,PcandQc,toamonopolist’spriceandquantity,PmandQm.Becauseofthehigherprice,consumersloseA+B

andproducergainsA−C.ThedeadweightlossisB+C.RentSeeking●

rentseekingSpendingmoneyinsociallyunproductiveeffortstoacquire,maintain,orexercisemonopoly.Wewouldexpecttheeconomicincentivetoincurrent-seekingcoststobearadirectrelationtothegainsfrommonopolypower(i.e.,rectangleAminustriangleC.)PRICEREGULATIONFIGURE10.11(1of2)Ifleftalone,amonopolistproducesQmandchargesPm.WhenthegovernmentimposesapriceceilingofP1thefirm’saverageandmarginalrevenueareconstantandequaltoP1foroutputlevelsuptoQ1.Forlargeroutputlevels,theoriginalaverageandmarginalrevenuecurvesapply.Thenewmarginalrevenuecurveis,therefore,thedarkpurpleline,whichintersectsthemarginalcostcurveatQ1.PriceRegulationPRICEREGULATIONFIGURE10.11(2of2)WhenpriceisloweredtoPc,atthepointwheremarginalcostintersectsaveragerevenue,outputincreasestoitsmaximumQc.Thisistheoutputthatwouldbeproducedbyacompetitiveindustry.Loweringpricefurther,toP3,reducesoutputtoQ3andcausesashortage,

Q’3−Q3.REGULATINGTHEPRICEOFANATURALMONOPOLYFIGURE10.12Afirmisanaturalmonopolybecauseithaseconomiesofscale(decliningaverageandmarginalcosts)overitsentireoutputrange.IfpricewereregulatedtobePcthefirmwouldlosemoneyandgooutofbusiness.SettingthepriceatPryieldsthelargestpossibleoutputconsistentwiththefirm’sremaininginbusiness;excessprofitiszero.NaturalMonopoly●naturalmonopolyFirmthatcanproducetheentireoutputofthemarketatacostlowerthanwhatitwouldbeiftherewereseveralfirms.Theregulationofamonopolyissometimesbasedontherateofreturn

thatitearnsonitscapital.Theregulatoryagencydeterminesanallowedprice,sothatthisrateofreturnisinsomesense“competitive”or“fair.”Althoughitisakeyelementindeterminingthefirm’srateofreturn,afirm’scapitalstockisdifficulttovalue.Whilea“fair”rateofreturnmustbebasedonthefirm’sactualcostofcapital,thatcostdependsinturnonthebehavioroftheregulatoryagency.Regulatorylagisatermassociatedwithdelaysinchangingregulatedprices.Anotherapproachtoregulationissettingpricecapsbasedonthefirm’svariablecosts.Apricecapcanallowformoreflexibilitythanrate-of-returnregulation.Underpricecapregulation,forexample,afirmwouldtypicallybeallowedtoraiseitspriceseachyear(withouthavingtogetapprovalfromtheregulatoryagency)byanamountequaltotheactualrateofinflation,minusexpectedproductivitygrowth.RegulationinPractice●rate-of-returnregulationMaximumpriceallowedbyaregulatoryagencyisbasedonthe(expected)rateofreturnthatafirmwillearn.Monopsony10.5●

oligopsonyMarketwithonlyafewbuyers.●

monopsonypowerBuyer’sabilitytoaffectthepriceofagood.●

marginalvalueAdditionalbenefitderivedfrompurchasingonemoreunitofagood.●

marginalexpenditureAdditionalcostofbuyingonemoreunitofagood.●

averageexpenditurePricepaidperunitofagood.COMPETITIVEBUYERCOMPAREDTOCOMPETITIVESELLERFIGURE10.13In(a),thecompetitivebuyertakesmarketpriceP*asgiven.Therefore,marginalexpenditureandaverageexpenditureareconstantandequal;quantitypurchasedisfoundbyequatingpricetomarginalvalue(demand).In(b),thecompetitiveselleralsotakespriceasgiven.Marginalrevenueandaveragerevenueareconstantandequal;quantitysoldisfoundbyequatingpricetomarginalcost.MONOPSONISTBUYERFIGURE10.14Themarketsupplycurveismonopsonist’saverageexpenditurecurveAE.Becauseaverageexpenditureisrising,marginalexpenditureliesaboveit.ThemonopsonistpurchasesquantityQ*m,wheremarginalexpenditureandmarginalvalue(demand)intersect.ThepricepaidperunitP*misthenfoundfromtheaverageexpenditure(supply)curve.Inacompetitivemarket,priceandquantity,PcandQc,arebothhigher.Theyarefoundatthepointwhereaverageexpenditure(supply)andmarginalvalue(demand)intersect.MONOPOLYANDMONOPSONYFIGURE10.15Thesediagramsshowthecloseanalogybetweenmonopolyandmonopsony.(a)Themonopolistproduceswheremarginalrevenueintersectsmarginalcost.Averagerevenueexceedsmarginalrevenue,sothatpriceexceedsmarginalcost.(b)Themonopsonistpurchasesuptothepointwheremarginalexpenditureintersectsmarginalvalue.Marginalexpenditureexceedsaverageexpenditure,sothatmarginalvalueexceedsprice.MonopsonyandMonopolyComparedMONOPSONYPOWER:ELASTICVERSUSINELASTICSUPPLYFIGURE10.16Monopsonypowerdependsontheelasticityofsupply.Whensupplyiselastic,asin(a),marginalexpenditureandaverageexpendituredonotdifferbymuch,sopriceisclosetowhatitwouldbeinacompetitivemarket.Theoppositeistruewhensupplyisinelastic,asin(b).MonopsonyPower10.6SourcesofMonopsonyPowerELASTICITYOFMARKETSUPPLYIfonlyonebuyerisinthemarket—apuremonopsonist—itsmonopsonypoweriscompletelydeterminedbytheelasticityofmarketsupply.Ifsupplyishighlyelastic,monopsonypowerissmallandthereislittlegaininbeingtheonlybuyer.NUMBEROFBUYERSWhenthenumberofbuyersisverylarge,nosinglebuyercanhavemuchinfluenceoverprice.Thuseachbuyerfacesanextremelyelasticsupplycurve,sothatthemarketisalmostcompletelycompetitive.INTERACTIONAMONGBUYERSIffourbuyersinamarketcompeteaggressively,theywillbidupthepriceclosetotheirmarginalvalueoftheproduct,andwillthushavelittlemonopsonypower.Ontheotherhand,ifthosebuyerscompetelessaggressively,orevencollude,priceswillnotbebidupverymuch,andthebuyers’degreeofmonopsonypowermightbenearlyashighasiftherewereonlyonebuyer.DEADWEIGHTLOSSFROMMONOPSONYPOWERFIGURE10.17TheSocialCostsofMonopsonyPowerTheshadedrectangleandtrianglesshowchangesinbuyerandsellersurpluswhenmovingfromcompetitivepriceandquantity,PcandQc,tothemonopsonist’spriceandquantity,PmandQm.Becausebothpriceandquantityarelower,thereisanincreaseinbuyer(consumer)surplusgivenbyA−B.Producersurplusfallsby

A+C,sothereisadeadweightlossgivenbytrianglesBandC.BilateralMonopoly●

bilateralmonopolyMarketwithonlyonesellerandonebuyer.Itisdifficulttopredictthepriceandquantityinabilateralmonopoly.Boththebuyerandthesellerareinabargainingsituation.Bilateralmonopolyisrare.Althoughbargainingmaystillbeinvolved,wecanapplyaroughprinciplehere:Monopsonypowerandmonopolypowerwilltendtocounteracteachother.Inotherwords,themonopsonypowerofbuyerswillreducetheeffectivemonopolypowerofsellers,andviceversa.Thistendencydoesnotmeanthatthemarketwillenduplookingperfectlycompetitive,butingeneral,monopsonypowerwillpushpriceclosertomarginalcost,andmonopolypowerwillpushpriceclosertomarginalvalue.EXAMPLE10.5MONOPSONYPOWERINU.S.MANUFACTURINGTheroleofmonopsonypowerwasinvestigatedto

determinetheextenttowhichvariationsinprice-

costmarginscouldbeattributedtovariationsin

monopsonypower.Thestudyfoundthatbuyers’monopsonypowerhad

animportanteffectontheprice-costmarginsof

sellers.Inindustrieswhereonlyfourorfivebuyersaccountforallornearlyallsales,theprice-costmarginsofsellerswouldonaveragebeasmuchas10percentagepointslowerthanincomparableindustrieswithhundredsofbuyersaccountingforsales.EachmajorcarproducerintheUnitedStatestypicallybuysanindividualpartfromatleastthree,andoftenasmanyasadozen,suppliers.Foraspecializedpart,asingleautocompanymaybetheonlybuyer.Asaresult,theautomobilecompanieshaveconsiderablemonopsonypower.Notsurprisingly,producersofpartsandcomponentsusuallyhavelittleornomonopolypower.LimitingMarketPower:TheAntitrustLaws10.7●

antitrustlawsRulesandregulationsprohibitingactionsthatrestrain,orarelikelytorestrain,competition.Excessivemarketpowerharmspotentialpurchasersandraisesproblemsofequityandfairness.Inaddition,marketpowerreducesoutput,whichleadstoadeadweightloss.Intheory,afirm’sexcessprofitscouldbetaxedaway,butredistributionofthefirm’sprofitsisoftenimpractical.Tolimitthemarketpowerofanaturalmonopoly,suchasanelectricutilitycompany,directpriceregulationistheanswer.Itisimportanttostressthat,whiletherearelimitations(suchascolludingwithotherfirms),ingeneral,itisnotillegaltobeamonopolistortohavemarketpower.Onthecontrary,wehaveseenthatpatentandcopyrightlawsprotectthemonopolypositionsoffirmsthatdevelopeduniqueinnovations.RestrictingwhatFirmscando●para