Ch10 - Chapter 10 Market Power Monopoly and Monopsony PART III MARKET STRUCTURE AND COMPETITVE STRATEGY CHAPTER 10 MARKET POWER MONOPOLY AND

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Unformatted text preview: Chapter 10: Market Power : Monopoly and Monopsony PART III MARKET STRUCTURE AND COMPETITVE STRATEGY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY TEACHING NOTES This chapter covers both monopoly and monopsony in order to highlight the similarity between the two types of market power. The chapter begins with a discussion of monopoly in sections 1-4. Section 5 first discusses monopsony, and then offers an instructive comparison of monopoly and monopsony. Section 6 discusses sources of monopsony power and the social costs of monopsony power, while section 7 concludes with a discussion of antitrust law. If you are pressed for time you might choose to only cover the first four sections on monopoly and skip the remainder of the chapter. Section 7 can be covered even if you choose to skip sections 5 and 6. The last part of section 1 on the multiplant firm can also be skipped if you are pressed for time. Although chapter 8 presented the general rule for profit maximization, you should review marginal revenue and price elasticity of demand through a careful derivation of Equation 10.1. A discussion of the derivation of Equation 10.1 will elucidate the geometry of Figure 10.3. Point out that because marginal revenue is positive at the profit maximizing level of price and quantity for a monopolist, demand at that quantity is elastic. Equation 10.1 also leads directly to the Lerner Index in Section 10.2. This provides fruitful ground for a discussion of a monopolist’s market power. For example, if E d is large (e.g., because of close substitutes), then (1) the demand curve is relatively flat, (2) the marginal revenue curve is relatively flat (although steeper than the demand curve), and (3) the monopolist has little power to raise price above marginal cost. To reinforce these points, introduce a non-linear demand curve by, for example, showing the location of the marginal revenue curve for a unit-elastic demand curve. Once this concept has been clearly presented, the discussion of the effect of an excise tax on a monopolist with non-linear demand (Figure 10.5) will not seem out of place. The social costs of market power are a good topic for class discussion, and this topic can be introduced by comparing the deadweight loss associated with monopoly with the analysis of market intervention given in Chapter 9. For example, compare Figure 10.10 with Figure 9.5. Given that Exercises (9), (13), and (15) involve “kinked marginal revenue curves,” you should present Figure 10.11 if you plan to assign those problems. Although Figure 10.11 is complicated, exposure to it here 10....
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This note was uploaded on 06/06/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.

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Ch10 - Chapter 10 Market Power Monopoly and Monopsony PART III MARKET STRUCTURE AND COMPETITVE STRATEGY CHAPTER 10 MARKET POWER MONOPOLY AND

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