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Ch10 - PARTIII CHAPTER10 MARKETPOWER: TEACHINGNOTES This...

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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 
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