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Lecture_14_final

Lecture_14_final - Chapter 10 Market Power II Monopoly and...

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1 Chapter 10 Market Power II: Monopoly and Monopsony and Antitrust
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2 Last Time Monopoly versus Perfect Competition Monopolists are price makers and face downward sloping demand curves Monopolists choose q such that MC=MR, but MR=P(1+1/Ed) When I sell one more unit I get P from the sale, and I cause the price to fall as well
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3 Today Social Cost of Monopoly Regulating Monopolies: setting price Laws against Monopolies: Antitrust
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4 Sources of Monopoly Power Why do some firms have considerable monopoly power, and others have little or none? Monopoly power is determined by ability to set price higher than marginal cost A firm’s monopoly power, therefore, is determined by the firm’s elasticity of demand
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5 Sources of Monopoly Power The less elastic the demand curve, the more monopoly power a firm has The firm’s elasticity of demand is determined by: 1) Elasticity of market demand 2) Number of firms in market 3) The interaction among firms
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6 Example: Supermarkets & Convenience Stores Supermarkets ( 29 MC. above 11% - 10 about set Prices stores individual for 3. product Similar 2. firms Several 1. . 5 ) ( 11 . 1 9 . 0 1 . 1 1 . 4 10 MC MC MC P E d = = - + = - =
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7 Example: Supermarkets & Convenience Stores Convenience Stores ( 29 1. Higher prices than supermarkets 2. Convenience differentiates them 3. 5 4. 1.25( ) 1 1 5 0.8 5. Prices set about 25% above MC. d E MC MC P MC = - = = = + -
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8 Elasticity of Market Demand With one firm, their demand curve is market demand curve Degree of monopoly power is determined completely by elasticity of market demand With more firms, individual demand may differ from market demand Demand for a firm’s product is more elastic than the market elasticity
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9 Number of Firms The monopoly power of a firm falls as the number of firms increases; all else equal Market is highly concentrated if only a few firms account for most of the sales Firms would like to create barriers to entry to keep new firms out of market Patents (Pringles), copyrights, licenses, economies of scale, brands (Coke)
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10 Herfindahl-Hirschman Concentration Index (HHI) = firm firms share market Herfindahl 2 ) (% For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (30 2 + 30 2 + 20 2 + 20 2 = 2600).
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11 THE HERFINDAHL-HIRSCHMAN INDEX Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated, and
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