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Austrian Microeconomics, Lecture 6 with Peter Klein - Mises Academy
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Austrian Microeconomics, Lecture 6 with Peter Klein - Mises Academy

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For lecture videos, readings, and other class materials, you can sign up for this independent study course at academy.mises.org

For lecture videos, readings, and other class materials, you can sign up for this independent study course at academy.mises.org

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  • 1. Peter G. Klein | Mises Academy 20121 | Competition and MonopolyPeter G. KleinUniversity of MissouriAugust 23, 2012Austrian MicroeconomicsCompetition andMonopoly
  • 2. Peter G. Klein | Mises Academy 20122 | Competition and MonopolyThe meaning of competition► Competition as rivalry► Competition as freedom(absence of legal restrictions) Anyone can try to compete in anyparticular market Not everyone can effectivelycompete!► The common-law meaning of monopoly► The imaginary constructions of “perfect” and “imperfect”competition
  • 3. Peter G. Klein | Mises Academy 20123 | Competition and MonopolyA simple theory of “monopoly” pricing► Menger and his followers: monopoly (and monopsony)defined in terms of characteristics of buyers and sellers in themarket (exogenously determined)► Theory virtually forgotten after “imperfectcompetition revolution” of the 1930s(Chamberlin, Robinson)► Revived by Mises (1949) and Rothbard (1962),who emphasized the role of legal restrictions
  • 4. Peter G. Klein | Mises Academy 20124 | Competition and MonopolyMonopoly pricing I► Seller possesses one unit of the good Good goes to the most capable buyer at a price between his reservationprice and the reservation price of the next most capable buyer (andabove the seller’s reservation price).BuyersB1B2B3B4B5Pmax$300$275$250$225$200Seller’sreservation price$150Q* = 1$275 < P* < $300
  • 5. Peter G. Klein | Mises Academy 20125 | Competition and MonopolyMonopoly pricing II► Seller possesses multiple units of the good Goods go to the most capable buyers who value the good at a priceabove the seller’s reservation price, at a price between the reservationprice of the last buyer and the first non-buyer.BuyersB1B2B3B4B5Pmax$300$275$250$225$200Seller’sreservation price$150Q* = 3$225 < P* < $250
  • 6. Peter G. Klein | Mises Academy 20126 | Competition and MonopolyMonopoly pricing III► Multiple sellers, same reservation prices Goods go to the most capable buyers who value the good at a priceabove the sellers’ reservation prices, at a price between the reservationprice of the last buyer and the first non-buyer.BuyersB1B2B3B4B5Pmax$300$275$250$225$200Pmin$150$150$150$150$150SellersS1S2S3S4S5Q* = 5$150 < P* < $200
  • 7. Peter G. Klein | Mises Academy 20127 | Competition and MonopolyMonopoly pricing IV► Multiple sellers, same reservation prices Goods go to the most capable buyers who value the good at a priceabove the sellers’ reservation prices, at a price between the reservationprice of the last buyer and the first non-buyer.BuyersB1B2B3B4B5Pmax$300$275$250$225$200Pmin$240$240$240$240$240SellersS1S2S3S4S5Q* = 3$240 < P* < $250
  • 8. Peter G. Klein | Mises Academy 20128 | Competition and MonopolyMonopoly pricing V► Multiple sellers, different reservation prices Price and quantity determined by the valuations of the “marginal pairs”(Böhm-Bawerk)BuyersB1B2B3B4B5Pmax$300$275$250$225$200Pmin$150$170$190$210$230SellersS1S2S3S4S5Q* = 4$210 < P* < $225
  • 9. Peter G. Klein | Mises Academy 20129 | Competition and MonopolyMonopoly pricing: implications► Equilibrium prices and quantities depend not on the numbersof buyers and sellers per se, but the reservation prices of thebuyers and sellers in the market. If all sellers have the same reservation prices (below at least somebuyers’ reservation prices), then equilibrium prices are decreasing inthe number of sellers, ceteris paribus. If all buyers have the same reservation prices (above at least somesellers’ reservation prices), then equilibrium prices are increasing inthe number of buyers, ceteris paribus. But no reason to believe these are the “usual” cases!► No particular normative implications, absent legalrestrictions!
  • 10. Peter G. Klein | Mises Academy 201210 | Competition and Monopoly“Perfect” and “imperfect” competition► Imaginary constructions, but not useful ones► Markets characterized by Type of product (homogenous, differentiated, unique) Numbers and sizes of buyers and sellers Entry and exit conditions (legal and non-legal) Information conditions (perfect or imperfect)► Examples: perfect competition,monopolistic competition, oligopoly,monopoly
  • 11. Peter G. Klein | Mises Academy 201211 | Competition and MonopolyThe perfectly competitive firmPQMCD = MRPPCFirm maximizesprofit by producingthe quantity atwhich MR = MCDemand curveassumed to beperfectly elasticQPC
  • 12. Peter G. Klein | Mises Academy 201212 | Competition and MonopolyDemand and marginal revenueExampleDemand curveP QD TR MR10 1 10 —9 2 18 88 3 24 67 4 28 46 5 30 25 6 30 04 7 28 -2PQDMR610 elasticunit elasticinelastic
  • 13. Peter G. Klein | Mises Academy 201213 | Competition and MonopolyThe firm with “market power”PQMCDPMQMMRFirm maximizesprofit by producingthe quantity atwhich MR = MC“Market power” =downward-slopingdemand curveFirm “restricts”output to increaseprofit (assumingdemand curve isinelastic above the“competitive” priceP1P2Q1
  • 14. Peter G. Klein | Mises Academy 201214 | Competition and MonopolyProblems with the market-power approach► No infinitesimally small units, so every firm faces a downward-sloping demand curve.► Requiring firms to increase output beyond the profit-maximizing quantity violates owners’ property rights, loweringsocial welfare (movie star example).► Elasticity of demand reflects consumer preferences Existence of close substitutes (an economic, not a technological,concept)► Sellers are constrained by potential competition. “Predatory pricing” example
  • 15. Peter G. Klein | Mises Academy 201215 | Competition and MonopolyThe role of potential competition► Example with one-sided competition among buyers Case I: seller faces no potential competitionBuyersB1B2B3B4B5Pmax$300$275$250$225$200Seller’sreservation priceS1 $290Q* = 1$290 < P* < $300
  • 16. Peter G. Klein | Mises Academy 201216 | Competition and MonopolyThe role of potential competition► Example with one-sided competition among buyers Case I: seller faces a potential competitor.BuyersB1B2B3B4B5Pmax$300$275$250$225$200Seller’sreservation priceS1 $290(S2 $280)Q* = 1$280 < P* < $300
  • 17. Peter G. Klein | Mises Academy 201217 | Competition and MonopolyGovernment-granted monopoly► Obvious sources of monopoly privilege Patents Exclusive grants, charters, and concessions Licenses Tariffs and quotas► Less obvious sources Progressive taxation (limits capital accumulation, which favorsincumbent firms) Labor and environmental restrictions (Clean Air Act, Americans withDisability Act)
  • 18. Peter G. Klein | Mises Academy 201218 | Competition and MonopolyAntitrust policy► Two “free-market” views Government should refrain from granting monopoly privilege. Monopoly arises naturally, on the market, and government shouldintervene to promote competition.► US antitrust laws to “promote competition” Sherman Act (1890): outlaws “restraints on trade” throughmonopolistic practices Clayton Act (1914): outlaws price discrimination, “tying” Robinson-Patman Act (1936): outlaws“predatory pricing”
  • 19. Peter G. Klein | Mises Academy 201219 | Competition and MonopolyPractical problems with antitrust policy► Large market share is the consequence, not the cause, ofsuperior financial performance.► The relevant market is hard to define.► Suits can be filed either by government agencies (FTC andDOJ) or by rival firms, which may use the law to punish a moreefficient competitor. The historical origins of antitrust► Suits can last a long time, but markets change very rapidly(IBM case).
  • 20. Peter G. Klein | Mises Academy 201220 | Competition and MonopolyThe dilemma of antitrust“You’re gouging on your prices ifYou charge more than the rest.But it’s unfair competitionIf you think you can charge less!A second point that we would like to makeTo help avoid confusion:Don’t try to charge the same amount!That would be collusion!”— R.W. Grant, Tom Smith and His IncredibleBread Machine (1964)
  • 21. Peter G. Klein | Mises Academy 201221 | Competition and MonopolyTheoretical problems with antitrust policy► No scientific means of distinguishing, in the real world,“monopoly prices” from “competitive prices” (other than theexistence of government-created entry barriers)► Legal problem: antitrust laws are ex post facto
  • 22. Peter G. Klein | Mises Academy 201222 | Competition and MonopolyTakeaways from the course► Austrian microeconomics Focus on “mundane” economic topics, not esoterica Not simply a verbal representation of neoclassical economics► Emphasis on cause and effect► Focus on real market behavior (prices, quantities, other actions)► Hence, “causal-realist” economics► For further study Rothbard’s Man, Economy, and State; Mises’s Human Action Austrian Macroeconomics with Joseph Salerno Applications of mundane economics to business cycles,entrepreneurship, regulation, trade, education, . . . . Mises.org
  • 23. Peter G. Klein | Mises Academy 201223 | Competition and Monopoly