rlecture24 - review

rlecture24 - review - Review USC Marshall Introduction...

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eview Review USC Marshall
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Introduction Covered after spring break: – Imperfect competition • Monopoly and monopsony •Competition between firms –Bertrand, Cournot and differentiated products – Markets with asymmetric information • Adverse selection – signaling and screening • Moral hazard USC Marshall
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Monopoly •A monopolist is the single supplier of a good or a product – Lack of nearby substitutes Profit-maximization: – Profit-maximizing quantity solves R C – Equivalently, profit-maximizing price is given by the MR Q MC Q inverse-elasticity rule: P MC Q 1 USC Marshall P | E d |
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Monopoly Welfare: – A firm with market power (facing a downward- sloping demand curve) has an incentive to restrict its output below the competitive equilibrium to raise the market price – This leads to a deadweight loss from monopoly ricing pricing USC Marshall
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Monopoly P Demand deadweight loss from monopoly pricing MC P monopoly P competitive MR USC Marshall Q Q competitive Q monopoly
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Monopsony •A monopsonist is the single buyer of a good or a service • Much like a monopolist, a monopsonist uses his market power to maximize his total net surplus, total benefit minus total expenditure Solution: MB Q ME Q – Facing an upward-sloping supply curve, a monopsonist will strategically withhold his demand wer e price he needs to pay USC Marshall to lower the price he needs to pay
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Monopsony P Demand (MB) ME MC deadweight loss P competitive P monopsony USC Marshall Q Q competitive Q monopsony
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Non-price effects of monopoly • Being a monopolist (or a monopsonist) is a good position to be in, because it allows the firm to earn positive economic profits The good: • Firms compete to be the best in the business to earn these profits, leading to product innovation, wer costs new products lower costs, new products,… –Protection through patents he bad: The bad: • Rent-seeking and attempts to monopolize arkets USC Marshall markets –Abuse of market power is illegal
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Regulation • Market power leads to a deadweight loss, which is bad for the society • Government can: – Encourage competition between firms • Antitrust legislation – Direct regulation of prices • Natural monopolies, where it is efficient to have only one firm operating in an industry – Shift towards relying on markets and less reliance on direct regulation USC Marshall
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Pricing strategies Pricing multiple products: – A producer of a single product chooses output so that MR(Q)=MC(Q). – A producer of multiple products needs to account for the impact that the price of one product has on the demand for the other ubstitutes: rice both higher than if they were Substitutes: price both higher than if they were produced by two separate firms ower price for one steals sales of the other Lower price for one steals sales of the other Complements: generally price both lower than if they were produced by two separate firms USC Marshall – Lower price for one increases sales for the other
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This note was uploaded on 09/10/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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rlecture24 - review - Review USC Marshall Introduction...

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