Bài giảng Microeconomics - Chapter 9 Market Imperfections

Market ImperfectionsPart 30What is Part 3 about?1Monopoly and Other Forms of Imperfect Competition (Ch. 9): Preview2Thinking Strategically (Ch. 10): Preview3Externalities and Property Rights (Ch. 11): Preview4The Economics of Information (Ch. 12): Preview5Monopoly and Other Forms of Imperfect Competition6What is Chapter 9 about?7I. Imperfect Competition and Market PowerSlide 9 - 88A. Price Taker v. Price SetterPerfectly Competitive Firm:A firm that must take the price in the marketA price takerImperfectly Competitive Firm:A firm with at least some latitude to set its own priceA price setter9B. Forms of Imperfect CompetitionPure monopolistA firm that is the only supplier of a unique product with no close substitutesOligopolistA firm that produces a product for which only a few rival firms produce close substitutesMonopolistically competitive firmOne of a large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another10The Key Difference – elasticity of demandA perfectly competitive firm faces a perfectly elastic demand curve for its productFirms take the price in the market, where supply and demand curves intersect, as a givenCharging a higher or a lower price is not feasibleAn imperfectly competitive firm faces a downward-sloping demand curveFirm now has a pricing decision to makeCharging a price different from competitors may be advantageous11Fig. 9.1The Demand Curves Facing Perfectly and Imperfectly Competitive Firms12Market PowerMarket Power:A firm’s ability to raise the price of a good without losing all its sales“Market Power” does not mean that a firm can sell any quantity at any price it wishes.If price is raised, quantity demanded falls – but only somewhat, so the crucial issue is “how much?”13Sources of Market PowerMarket power arises from factors that limit competition, such as:Exclusive control over inputsEconomies of scalePatents and copyrights, whichGrant exclusive rights for a specified time periodPromote monopoly but reward innovationGovernment licenses or franchisesAnything that restricts the entry of competitors (e.g. pricing policy of the established firm)14Returns to ScaleConstant returns to scaleWhen all inputs are changed by a given proportion, output changes by the same proportionIncreasing returns to scaleWhen all inputs are changed by a given proportion, output changes by a higher proportionAlso known as Economies of Scale15Economies of ScaleImplications:Average cost of production falls as output increasesHigh start-up costsExpensive to enter the industryLow marginal costsEstablished firms can undercut new entrantsE.g.: oil refineries, networks, autos, etc.16Fig. 9.2 Total and Average Costs for a Production Process with Economies of Scale17Tables 9.1 and 9.2Economies of Scale and the Magnitude of Fixed CostsTable 9.1Table 9.218II. Profit Maximization under Imperfect CompetitionSlide 9 - 1919Profit MaximizationGoal of firm: Maximize profitsMarginal Revenue (MR) is benefit of increasing productionMarginal Cost (MC) is cost of increasing productionRule:Expand output when MR > MCDecrease output when MC > MRSell the quantity of output where marginal revenue equals marginal cost, MR = MC20Fig. 9.3The Profit-Maximizing Output Level for a Perfectly Competitive Watermelon Farmer21Monopolist’s Marginal RevenueMarginal RevenueThe change in a firm’s total revenue that results from a one-unit change in outputFor a monopolist (& for other imperfectly competitive firms)The marginal benefit of selling an additional unit is less than the market price if an extra unit can be sold only if prices on all preceding units are lowered22Fig. 9.4The Monopolist’s Benefit from Selling an Additional Unit2324Fig. 9.5Marginal Revenue in Graphical Form25Fig. 9.6The Marginal Revenue Curve for a Monopolist with a Straight-Line Demand Curve26Fig. 9.7The Marginal Revenue Curve for a Specific Demand Curve27Profit-Maximizing RuleProfit is maximized at the level of output for which MR = MCA monopolist uses the demand curve to set the price which will keep the quantity demanded (and hence production) at its profit-maximizing output28Fig. 9.8The Demand and Marginal Cost Curvesfor a Monopolist29Fig. 9.9The Monopolist’s Profit-Maximizing Output Level30III. Why the Invisible Hand Breaks Down Under MonopolySlide 9 - 3131Fig. 9.10The Demand and Marginal Cost Curves for a Monopolist32Fig. 9.11The Deadweight Loss from MonopolyDeadweight lossMarginal cost33Monopoly and EfficiencySocially efficient level of output is where Marginal Benefit to consumers = Marginal Cost to producersThe monopolist produces less than socially efficient level of outputMarginal Return (to the Monopolist) is less than Marginal Benefit (to consumers) Monopolists are not efficientInefficiency is measured by deadweight lossMonopoly profits also redistribute income34Fig. 9.12The Distributive Effect of MonopolyDeadweight lossMarginal costDMRAQuantity (units/week)Price ($/unit of output)812242346Producer’s (monopolist’s) surplus 35IV. Using Discounts to Expand the MarketSlide 9 - 3636Price DiscriminationPrice DiscriminationThe practice of charging different buyers different prices for essentially the same good or serviceDiscounts to senior citizens, childrenSuper-saver discounts on air travelRebate coupons on retail merchandiseMost effective when the good or service cannot easily be resold37Types of Price DiscriminationPerfect price discrimination firm charges each buyer exactly his or her reservation priceHurdle method of price discriminationseller offers a discount to all buyers who overcome some obstacle: examples =A rebate that takes time and effort to mail inTime spent waiting38Implications of Price DiscriminationThe number of trades increaseBrings output closer to the socially efficient levelReduces deadweight loss and increases total economic surplusMonopolist captures more to the potential consumer surplus39End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 9 - 4040What is Chapter 9 about?41I. Imperfect Competition and Market Power42II. Profit Maximization for the Monopolist43III. Why the Invisible Hand Breaks Down Under Monopoly44IV. Using Discounts to Expand the Market45Summary of Chapter 946