Bài giảng Managerial Economics - Chapter 012: Managerial Decisions for Firms with Market Power

Chapter 12: Managerial Decisions for Firms with Market PowerMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Market PowerAbility of a firm to raise price without losing all its salesAny firm that faces downward sloping demand has market powerGives firm ability to raise price above average cost & earn economic profit (if demand & cost conditions permit)MonopolySingle firmProduces & sells a good or service for which there are no good substitutesNew firms are prevented from entering market because of a barrier to entryMeasurement of Market PowerDegree of market power inversely related to price elasticity of demandThe less elastic the firm’s demand, the greater its degree of market powerThe fewer close substitutes for a firm’s product, the smaller the elasticity of demand (in absolute value) & the greater the firm’s market powerWhen demand is perfectly elastic (demand is horizontal), the firm has no market powerLerner index measures proportionate amount by which price exceeds marginal cost:Equals zero under perfect competitionIncreases as market power increasesAlso equals –1/E, which shows that the index (& market power), vary inversely with elasticityThe lower the elasticity of demand (absolute value), the greater the index & the degree of market powerMeasurement of Market PowerIf consumers view two goods as substitutes, cross-price elasticity of demand (EXY) is positiveThe higher the positive cross-price elasticity, the greater the substitutability between two goods, & the smaller the degree of market power for the two firmsMeasurement of Market PowerEntry of new firms into a market erodes market power of existing firms by increasing the number of substitutesA firm can possess a high degree of market power only when strong barriers to entry existConditions that make it difficult for new firms to enter a market in which economic profits are being earnedBarriers to EntryCommon Entry BarriersEconomies of scaleWhen long-run average cost declines over a wide range of output relative to demand for the product, there may not be room for another large producer to enter marketBarriers created by governmentLicenses, exclusive franchisesEssential input barriersOne firm controls a crucial input in the production processBrand loyaltiesStrong customer allegiance to existing firms may keep new firms from finding enough buyers to make entry worthwhileCommon Entry BarriersConsumer lock-inPotential entrants can be deterred if they believe high switching costs will keep them from inducing many consumers to change brandsNetwork externalitiesOccur when benefit or utility of a product increases as more consumers buy & use itMake it difficult for new firms to enter markets where firms have established a large base or network of buyersCommon Entry BarriersDemand & Marginal Revenue for a MonopolistMarket demand curve is the firm’s demand curveMonopolist must lower price to sell additional units of outputMarginal revenue is less than price for all but the first unit soldWhen MR is positive (negative), demand is elastic (inelastic)For linear demand, MR is also linear, has the same vertical intercept as demand, & is twice as steepDemand & Marginal Revenue for a Monopolist (Figure 12.1)Short-Run Profit Maximization for MonopolyMonopolist will produce where MR = SMC as long as TR at least covers the firm’s total avoidable cost (TR ≥ TVC)Price for this output is given by the demand curveIf TR ATC, firm makes economic profitIf ATC > P > AVC, firm incurs a loss, but continues to produce in short runShort-Run Profit Maximization for Monopoly (Figure 12.3)Short-Run Loss Minimization for Monopoly (Figure 12.4)Long-Run Profit Maximization for MonopolyMonopolist maximizes profit by choosing to produce output where MR = LMC, as long as P  LACWill exit industry if P MRPProfit-Maximizing Input UsageMonopoly Firm’s Demand for Labor (Figure 12.6)Profit-Maximizing Input UsageFor a firm with market power, profit-maximizing conditions MRP = w and MR = MC are equivalentWhether Q or L is chosen to maximize profit, resulting levels of input usage, output, price, & profit are the sameMonopolistic CompetitionLarge number of firms sell a differentiated productProducts are close (not perfect) substitutesMarket is monopolisticProduct differentiation creates a degree of market powerMarket is competitiveLarge number of firms, easy entryShort-run equilibrium is identical to monopolyUnrestricted entry/exit leads to long-run equilibriumAttained when demand curve for each producer is tangent to LACAt equilibrium output, P = LAC and MR = LMCMonopolistic CompetitionShort-Run Profit Maximization for Monopolistic Competition (Figure 12.7)Long-Run Profit Maximization for Monopolistic Competition (Figure 12.8)Implementing the Profit-Maximizing Output & Pricing DecisionStep 1: Estimate demand equationUse statistical techniques from Chapter 7Substitute forecasts of demand-shifting variables into estimated demand equation to getQ = a′ + bPStep 2: Find inverse demand equationSolve for PImplementing the Profit-Maximizing Output & Pricing DecisionStep 3: Solve for marginal revenueWhen demand is expressed as P = A + BQ, marginal revenue isImplementing the Profit-Maximizing Output & Pricing DecisionStep 4: Estimate AVC & SMCUse statistical techniques from Chapter 10 AVC = a + bQ + cQ2 SMC = a + 2bQ + 3cQ2Step 5: Find output where MR = SMCSet equations equal & solve for Q*The larger of the two solutions is the profit-maximizing output levelStep 6: Find profit-maximizing priceSubstitute Q* into inverse demand P* = A + BQ* Q* & P* are only optimal if P  AVCImplementing the Profit-Maximizing Output & Pricing DecisionStep 7: Check shutdown ruleSubstitute Q* into estimated AVC functionIf P*  AVC*, produce Q* units of output & sell each unit for P* If P* $34 = ATC, Aztec should produce rather than shut downMaximizing Profit at Aztec Electronics: An ExampleComputation of total profitπ = TR – TVC – TFC = (P* x Q*) – (AVC* x Q*) – TFC = ($88 x 6,000) – ($34 x 6,000) - $270,000 = $528,000 - $204,000 - $270,000 = $54,000Maximizing Profit at Aztec Electronics: An ExampleProfit Maximization at Aztec Electronics (Figure 12.10)Multiple PlantsIf a firm produces in 2 plants, A & BAllocate production so MCA = MCBOptimal total output is that for which MR = MCTFor profit-maximization, allocate total output so that MR = MCT = MCA = MCBA Multiplant Firm (Figure 12.11)