Market Equilibrium and Market Demand: Imperfect Competition

1. MarketEquilibrium and Market Demand:Imperfect Competition Chapter 9a

2. Market Structure Characteristics • Number of firms and size distribution • Product differentiation • Barriers to entry • Existing economic environment Pages 180

3. Perfect Competition • Up to now, we have been assuming that the firm and market reflect the conditions of perfect competition… farmers come close as anybody to meeting these conditions. Why? • A large number of small firms (2 million farms) • A homogeneous product (no. 2 yellow corn) • Freely mobile resources (no barriers to entry caused by patents, etc. or barriers to exit) • Perfect knowledge of market conditions (quality outlook information from government and university sources) Page 180

4. Page 182

5. The marginal revenue in this instance is also downward sloping, and goes to zero at the point where total revenue peaks. Page 182

6. Types of Imperfect Competitors on the Selling Side • Monopolistic competition • Oligopoly • Monopoly Let’s start here…

7. Monopolistic Competitors • Many sellers • Ability to differentiate product by advertising and sales promotions • Profits can exist in the short run, but others bid them away in the long run • Equate MC with MR, but price of the downward sloping demand curve Page 181

8. Short-run profits. The firm produces where MR=MC at E above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay. Page 183

9. Short-run loss. The firm follows the same strategy by operating at QSR given by MC=MR at E and pricing off the demand curve. Page 183

10. At this quantity QSR, however, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above… Page 183

11. In the long run, profits are bid away as added firms enter the market. Or losses will no longer exists as firms exit the market. At QLR, the remaining firms are just breaking even as shown by the lack of gap between the demand curve and ATC curve. Page 184

12. Oligopolies • A few number of sellers • Nonprice competition between oligopolists • Match price cuts but not price cuts by fellow oligopolists • Like monopolistic competitors, they have some ability to set market prices Pages 184-185

13. Demand curve dd represents the case where a singleoligopolist changes its price. Demand curve DD represents the case when alloligopolists move prices together and share the market. Page 187

14. Page 187

15. Monopolies • Only seller in the market • Entry of other firms is restricted by patents, etc. • They have absolute power over setting market price • They produce a unique product • They can make economic profits in the long run because they can set price without competition Page 188

16. Total revenue is equal to the area OPECQE, which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A) and then reads up to the demand curve (point C) when setting price PE. Page 245

17. Total variable costs for the monopolist is equal to area ONAQE, or the yellow box to the left. Page 245

18. Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left… Page 245

19. Total cost is therefore equal to area OMBQE, or the green box plus the yellow box to the left. Page 189

20. Finally, the economic profit earned by the monopolist is equal to area MPECB, or total revenue (blue box) minus total costs (green box plus yellow box). Page 189

21. Summary of imperfect competitors from a selling perspective Page 190

22. Let’s compare a monopoly with perfect competition from an economic welfare perspective Page 191

23. Perfect Competition Case Consumer surplus under perfect competition is equal to the sum of areas 1, 4, 5, 8 and 9, or the blue triangle to the left. Page 191

24. Perfect Competition Case Producer surplus under perfect competition is equal to the sum of areas 2, 3, 6 and 7, or the green triangle to the left. Page 191

25. Perfect Competition Case Total economic surplus under perfect competition is therefore equal to the blue and green triangles to the left. Page 191

26. Monopoly Case Consumer surplus under a monopoly is equal to the sum of areas 8 and 9, or the new blue triangle to the left. Thus, consumers would be economically worse-off by areas 1, 5 and 9 under a monopoly. They are paying a higher price PM for a smaller quantity QM. Page 191

27. Monopoly Case Producer surplus under a monopoly is equal to the sum of areas 3, 4, 5, 6 and 7, or the green area to the left. Thus, producers lose area 2 but gain areas 4+5, making them economically better-off than perfect competitors. Page 191

28. Monopoly Case Finally, society as a whole would be economically worse-off by areas 1+2. This is called a dead-weight loss. This reflects the fact that less of the economy’s available resources in this market are being used to provide products to consumers…. Page 191

29. Types of Imperfect Competitors on the Buying Side • Monopsonistic competition • Oligopsony • Monopsony Let’s start here…

30. Monopsonies • Single buyer in the market • Focus is on the marginal input cost of purchasing an additional unit of resources • Will equate MVP=MIC when making buying decisions • As long as MVP>MIC, the monopsonist makes a profit Page 192

31. MIC Supply 0 2 4 6 8 MVP=MRP=MPP* MR=Demand 0 2 4 6 8 10 Quantity of Inputs

32. MIC Supply 0 2 4 6 8 MVP=MRP=MPP* AR=Demand 0 2 4 6 8 10 Quantity of Inputs Buying Decisions by Perfect Competitors

33. MIC Supply 0 2 4 6 8 Pmpc MVP MRP=MPP*AR 0 2 4 6 8 10 Qmpc Monopsony buying- PC selling

34. MIC Supply 0 2 4 6 8 Pmpc MVP MRP=MPP*AR 0 2 4 6 8 10 Qmpc Monopsony buying- PC selling

35. MIC Supply 0 2 4 6 8 Pmpc MVP MRP=MPP*AR 0 2 4 6 8 10 Qmpc Monopsony buying- PC selling

36. Buying Decisions by a Monopsonist Page 250

37. MIC Supply 0 2 4 6 8 Pmm MRP=MPP*MR 0 2 4 6 8 10 Quantity of Inputs QMM Monopoly -Monopsony

38. MIC Supply 0 2 4 6 8 Ppcm MVP MRP=MPP*MR 0 2 4 6 8 10 Quantity of Inputs QpcM PC buying- Monopoly selling

39. MIC Supply 0 2 4 6 8 Pmpc MVP MRP=MPP*MR 0 2 4 6 8 10 Qmpc Monopsony buying- PC selling

40. MIC Supply Ppcpc 0 2 4 6 8 MVP MRP=MPP*MR 0 2 4 6 8 10 Qpcpc PC buying- PC selling

41. Buying Decisions by a Monopsonist This causes price to fall from PPC to PM which is referred to as monopsonistic exploitation. Page 250

42. Equilibrium Conditions UnderAlternative Combinations ofMonopsony, Monopoly, andPerfect Competition

43. Case #1: Monopsonist in buying and sole seller of product. Equilibrium is where MRP=MIC at Point A. Pricing off supply curve gives QMM and PMM. Page 195

44. Case #2: Perfect competition in buying but monopoly in selling. Equilibrium is where MRP=Supply at Point C which gives QPCM and PPCM. Page 195

45. Case #3: Perfect competition in selling but monopsony in buying. Equilibrium is where MVP=MIC at Point E. Pricing off supply curve gives QMPC and PMPC. Page 195

46. Case #4: Perfect competition in both selling and buying. Equilibrium is where MVP=Supply at Point F which gives QPC and PPC. Page 195

47. Monopsonistic Competitors • Many firms buying resources • Ability to differentiate services to producers • Differentiated services includes distribution, convenience, and location of facilities, willingness to provide credit or technical assistance • P and Q determined same as monopsonist Page 252

48. Oligopsonies • A few number of buyers of a resource • Profit earned will depend on elasticity of supply for resource (less elastic than monopsonistic competition) • Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate • P and Q determined same as monopsonist Page 195

49. Various segments of the livestock industry exhibit several forms of imperfect competition. Page 196

50. Governmental Regulatory Measures Various approaches have been taken over time to counteract adverse effects of imperfect competition in the marketplace. These include: 1. Legislative acts passed by Congress, including the Sherman Antitrust Act 2. Price ceilings 3. Lump-sum Tax 4. Minimum price or floors