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  1. 1. More on Market Power April 10, 2013
  2. 2. Announcements• Problem Set 2 is now posted on the website.• PS2 due at the beginning of Monday’s class.
  3. 3. Last Class: Comparing Monopoly and Perfect Competition Perfect Competition: ``Price-Monopoly: ``Price-Setter’’ Taker’’ Choose Q and P to Zero Profits Always Profit-Maximize P >MR P = MR P > MC P = MC Deadweight No Deadweight Loss Loss 3
  4. 4. Learning Goals for Today• Expertly derive: – Monopoly profit-maximizing conditions – Monopoly profits – Surplus in a market with monopoly• Derive surplus when monopoly can price discriminate• Compare and contrast oligopoly and monopolistic competition with pure monopoly
  5. 5. Verizon is the only supplier of cable in a given city because no other canafford to lay down cable. What type of monopoly is it / what is the source of its market power?A. Exclusive control of inputs.B. Patents and copyrights.C. Government licenses.D. Network economies.E. Natural monopoly.
  6. 6. Say a monopoly pays 5 for a factory and uses production technologyQ=L1/2. The only input, labor (L), costsw=1 per unit. What is TC when Q=5?A. 10B. 15C. 20D. 25E. 30
  7. 7. As derived, TC=5+Q2. In addition, PD=10-2Q. What is closest to the monopolist’s profit-maximizing level quantity choice?A. 1B. 1.33C. 1.66D. 2E. 2.5
  8. 8. TC=5+Q2 and PD=10-2Q. What is closest to monopoly profits?A. Negative profit, shut down.B. 0C. 3.33D. 6.66E. 10
  9. 9. Claim: This is a natural monopoly like Verizon. Recall: FC=5, Q=L1/2, w=1.A. True.B. False: There is no capital in productionC. False: Fixed costs are too smallD. False: Marginal cost is increasing
  10. 10. Calculate Surplus• TC=5+Q2 and PD=10-2Q• Take 5 minutes to see if you can calculate CS, PS, and DWL for this economy on your own.• Hint: DWL is the difference between CS+PS in perfect competition versus CS+PS with some imperfection.• Will do on board when finished.
  11. 11. General Form of Monopoly Problems• Given: – Fixed Costs – Production Function: Generally Q=KaL1-a – Variable Costs: w for L and r for K – Demand• Derive: – TC, ATC, MC given Fixed Costs, Prod Func, and Var costs – MR given Demand – Profit-max. condition and Profit given the above – Surplus• Write your own using Q=K1/2 and r=1.
  12. 12. Now let’s switch gears• Price discrimination• Monopolistic competition• Oligopoly – All of these points are of secondary importance to monopoly for now.
  13. 13. Price Discrimination• Thus far we have assumed all buyers charged the same.• Price Discrimination: The practice of charging different buyers different prices for essentially the same good.• How does price discrimination affect output and profits? P P CS DWL PS PS MC=ATC MC=ATC MR D D Q Q Perfectly Price Single-Price Monopolist Discriminating Monopolist
  14. 14. Example• Rebates: The assumption is that people with high reservation prices are wealthy and that the opportunity cost of their time is too high to be bothered to fill out the paperwork to get the rebate.
  15. 15. Which of the following is price discrimination in this case?A. EfficientB. GoodC. InefficientD. BadE. Can’t Say
  16. 16. Other types of Imperfect Competition Besides MonopolyMonopolistic Competition: A market in which a large number of firms sell products that are close (but not perfect) substitutes. Examples? Have some ability to raise price in the short-run, but free entry will lead to zero (economic) profits in the long run. Most important strategic decision: how to differentiate products from rivals’ products? Markup
  17. 17. Types of Imperfect Competition3. Oligopoly: A market in which a small number of large firms sell products that are either close or perfect substitutes. Examples? Usually arise because of cost advantages of being large— thus, no presumption that free entry will drive profits to zero, but no guarantee that oligopolists will earn zero profits.
  18. 18. Next Class• We’ll begin with a clicker quiz on the material covered this week (if I can figure that out.)• It’s not graded, it’s for you to gauge your understanding.• If works out well, will make Friday mornings clicker quizzes from here out.