Monopsony - 10.5 Monopsony So far our discussion of market...

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Unformatted text preview: 10.5 Monopsony So far our discussion of market power has focused entirely on the seller side of the market. Now we turn to the buyer side. We will see that if there are not too many buyers, they can also have market power and use it profitably to affect the price they pay for a product. ' First, a few terms. Monopsony refers to a market in which there is a single buyer. An oligopsony is a market with only a few buyers. With one or only a few buyers, some buyers may have monopsony power—a buyer’s ability to affect the price of a good. Monopsony power enables the buyer to purchase the good for less than the price that would prevail in a competitive market. Suppose you are trying to decide how much of a good to purchase. You could apply the basic marginal principle—keep purchasing units of the good until the last unit purchased gives additional value, or utility, just equal to the cost of that last unit. In other words, on the margin, additional benefit should just be offset by additional cost. Recall from Chapter 4 that a person’s demand curve measures marginal value, or marginal utility, as a function of the quantity purchased. Therefore, your marginal value schedule is your demand curve for the good. But your mar- ginal cost of buying additional units of the good depends on whether you are a competitive buyer or a buyer with monopsony power. Suppose you are a competitive buyer, which means that you have no influ- ence over the price of the good. Then the cost of each unit you buy is the same, no matter how many units you purchase—it is the market price of the good. Figure 10.123 illustrates this. In that figure the price you pay per unit is your average expenditure per unit, and it is the same for all units. But what is your marginal expenditure per unit? As a competitive buyer, your marginal expenditure is equal to your average expenditure, which in turn is equal to the market price of the good. Figure 10.12a also shows your marginal value schedule (i.e., your demand curve). How much of the good should you buy? You should buy until the mar- ginal value of the last unit is just equal to the marginal expenditure on that unit. 50 you should purchase quantity Q‘ at the intersection of the marginal expenditure and demand curves. We introduced the concepts of marginal and average expenditure because they will make it easier to understand what happens when buyers have monopsony power. But before considering that situation, let’s look at the anal- ogy between competitive buyer conditions and competitive seller conditions. Figure 10.12b shows how a perfectly competitive seller decides how much to l . . P. Q- Quantity Q. Quantity \ FIGURE 10.12 Competitive Buyer Compared to Competitive Seller. The competitive buyer in (a) takes market price P‘ as given. Therefore, marginal expenditure and aver- age apenditure are constant and equal, and the quantity purchased is found by equating price to marginal value (demand). The competitive seller in (b) also takes price as given. Marginal revenue and average revenue are constant and equal, and quantity sold is found by equating price to marginal cost. \ produce and sell. Since the seller takes the market price as given, both aver- age and marginal revenue are equal to the price. The profit-maximizing quan- tity is at the intersection of the marginal revenue and marginal cost Curves. Now suppose that you are the only buyer of the good. You again face a mar- ket supply curve, which tells you how much producers are willing to sell as a function of the price you pay. Should the quantity you purchase be at the point where your marginal value curve intersects the market supply curve? No. If you want to maximize your net benefit from purchasing the good, you should purchase a smaller quantity, which you will obtain at a lower price. To determine how much to buy, set the marginal value from the last unit. purchased equal to the marginal expenditure on that unit.” But note that the market supply curve is not the marginal expenditure curve. The market supply curve shows how much you must pay per unit, as a function of the total num- "Mathematically, we can write the net benefit NB from the purchase as N8 = V - E, where V is the value to the buyer of the purchase, and E is the expenditure. Net benefit is maximized when ANB/AQ = 0. Then 1 ANB/AQ = AV/AQ — AHAQ = MV - ME = 0 so that MV = ME. 3 4 7 CHAPTER 10 MARKET POWER; MONOPOLY AND MONOI’SONY nits ou bu . In other words, the supply curve rs the average expendi- ltDuerreocfulrlve. Aitd sinZe this average expenditure curve 15 upward slotpugg, flat: marginal expenditure curve must lie aboveit because the decrsiont ph ueym'a extra unit raises the price that must be pard for all umts, not )us e one.H . ' . to ' . illustrates this. The optimal quantity for the .monopsom'st builtgélgfigtfolgnd at the intersection of the demand and marginal etrhpendrtufe curves. And the price that the monOpsonrst pays 15 found from t etlsérflp‘ curve; it is the price P; that brings forth the supply QM. Finally, m; e .0: ma quantity Q; is less, and the price P; is lower, than the quantity an pn would prevail in a competitive market, Q and Pr S/Q ME S=AE I i I i I I I i i Q2. Q Quanli')’ URE 10.13 Mono sonist Buyer. The market supply curve rs the monopsorust s Faverage expenditure cfrrve AE. Average expenditure-rs nsrng, so marginal lies above it. The monopsonist purchases quantity Q. where margrna qtpend from me marginal value (demand) intersect. The price per unit P. the: aria P and average expenditure (supply) curve. In a competitive market, prIce an tyéu, l ) Q" are both higher. They are found at the pornt where average expen I re pp y and marginal value (demand) intersect. " To obtain the marginal expenditure curve algebraically, write the supply curve with price 3n tire lit; hand side: P = I’(Q). Then total expenditure E is price times quantity, or E = P(Q)Q, an m rgr expenditure is ME = AHAQ = HQ) + MAP/A0) The supply curve is upward sloping, so AP/AQ is positive, and marginal expenditure is greater than average expenditure. ...
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Monopsony - 10.5 Monopsony So far our discussion of market...

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