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IMPERFECT COMPETITION
THE LATER NEOCLASSICALS
EDWARD CHAMBERLIN
1899-1967
 THE CASE FOR MONOPOLISTIC COMPETITION
 DIFFERENT THAN MONOPOLY OF COURNOT,
DUPUIT, AND THE CLASSICAL
CONSIDERATIONS OF MONOPOLY
 THIS THEORY DISTINGUISHES AMONGST
SELLERS AND MARKETS
 THE IDEA FOLLOWS COURNOT WITH A
DOWNWARD SLOPING DEMAND AND DEMAND
DIFFERENT FROM MARGINAL REVENUE
MC = MARGINAL COST; AC = AVERAGE COST; D = DEMAND; MR = MARGINAL
REVENUE
PRICE
THE MONOPOLIST ENJOYS A
TEMPORARY MONOPOLY, LIKE A
GEOGRAPHIC MONOPOLY, OR A
PRODUCT DIFFERENTIATION
MONOPOLY
MC
AC
N
M
PROFIT MAXIMIZATION IS WHERE
MR = MC --- AT THAT POINT, B IS
PRODUCED AND SOLD BUT AT
PRICE M --- MONOPOLY PROFITS
ARE THEN LMNS
L
S
MR
B
D
PRICE IS DERIVED FROM THE
DEMAND CURVE
QUANTITY
MONOPOLISTIC COMPETITION DEVELOPS ORIGINALLY BECAUSE OF PRODUCT
DIFFERENTIATION
THE PROFITS EARNED ATTRACT OTHER FIRMS TO GET INTO THE MARKET, BUT
WITH A SLIGHTLY DIFFERENTIATED PRODUCT RELATIVE TO THE ORIGINAL
MONOPOLIST
WITH THE NEW ENTRIES OF OTHER FIRMS INTO THE MARKET, THE DEMAND FOR
THE PRODUCT OF THE ORIGINAL MONOPOLY IS EVENTUALLY REDUCED, AND
REDUCES TO THE POINT WHERE AC IS NOW TANGENT TO DEMAND, AND PRICE
CHARGED IS P, WHICH IS NOW EQUAL TO AC
THE LONG RUN PRICE BECOMES P
= AC
PRICE
MC
AC
N
P = AC
UNDER THESE CONDITIONS THERE
IS A STABLIZATION IN THE MARKET
THERE IS NEITHER ENTRY NOR
EXIT FROM THE MARKET
AND MONOPOLIES COMPETE IN
THE MARKET WITH
DIFFERENTIATED PRODUCT
MR
A
D
QUANTITY
BOTH IN THE SHORTER RUN CASE AND IN THIS LONG RUN CASE, PRICE IS ALWAYS
GREATER THAN MARGINAL COST --- THE NEW SALES (AND PRODUCTION) FOR THE
ORIGINAL MONOPOLIST FIRM IS A ///// PRICE > MARGINAL COST
THE POINT, N, EXCEEDS THE LOWEST POINT ON AC – HENCE THERE IS EXCESS
CAPACITY AND ALLOCATIVE INEFFICIENCY BECAUSE P > MC
THIS CONCEPT OF MONOPOLISTIC COMPETITION LED TO THE
ALLOCATIVE INEFFICIENCY – X-INEFFICIENCY DEBATES
 X – INEFFICIENCY ARGUMENTS OF
HARVEY LEIBENSTEIN (1922- 1993)
 EXCESSIVE COSTS ARE INCURRED ON
PART OF OR IN PART OF THE FIRM
 CHAMBERLIN ARGUES THAT THERE IS
RESOURCE MISALLOCATION BECAUSE
PRICE > MARGINAL COST
 IN COMPETITIVE MARKETS, PROFIT
MAXIMIZATION COMES WHEN MARGINAL
REVENUE = MARGINAL COST
PRICE
UNDER PERFECT COMPETITION,
THE PROFIT MAXIMIZATION POINT
WOULD BE WHERE MC = DEMAND
(D), AND DEMAND = MARGINAL
REVENUE AT POINT K
MC
AC
N
THE PRICE CHARGED WOULD BE
M
PC
PC, AND PRICE = MARGINAL COST
AT THAT POINT
K
L
S
MR
B
C
D
THE SEPARATION OF DEMAND AND
MARGINAL REVENUE COMES BY
WAY OF MONOPOLY
QUANTITY
NOTICE ALSO, THAT PRODUCTION (SALES) IS AT POINT C > B UNDER PERFECT
COMPETITION
 SMITH, IN WEALTH OF NATIONS – POINTED OUT
THAT THE DIRECTORS OF A JOINT STOCK
COMPANY (CORPORATION), BEING THE
MANAGERS OF OTHER PEOPLE’S MONEY
RATHER THAN THEIR OWN, CANNOT BE
EXPECTED TO WATCH OVER THE OWNER’S
MONEY WITH THE SAME VIGILANCE AS WOULD
THE OWNERS IN A PRIVATE PARTNERSHIP.
SMITH ASSERTED THAT NEGLIGENCE AND
LAVISH EXPENDITURES THEREFORE MUST
ALWAYS PREVAIL IN THE MANAGEMENT OF
SUCH COMPANIES --- ONE OF HIS COMPLAINTS
ON MONOPOLY
 TODAY – ECONOMIST CALL THIS DIVERGENCE OF INTERESTS




THE
PRINCIPAL-AGENT PROBLEM [ GEORGE AKERLOF, JOSEPH
STIGLITZ, PAUL MILGROM, JOHN ROBERTS] THE PRINCIPALS
ARE THE CORPORATE OWNERS – THE STOCKHOLDERS—THEY
HIRE AGENTS IN THE FORM OF EXECUTIVES, MANAGERS,
WORKERS, & LAWYERS TO CARRY OUT PROFIT MAXIMIZING
ACTIVITIES ON THE PRINCIPAL’S BEHALF--- THE AGENTS,
HOWEVER, TEND TO MAXIMIZE THEIR OWN UTILITY, NOT
NECESSARILY THE PROFITS OF THE FACELESS
STOCKHOLDERS -- THE UTILITY MAY BE ACCOMPLISHED
THROUGH CORPORATE EXPENDITURES THAT RAISE, NOT
LOWER, THEIR EMPLOYER’S COSTS – SUCH AS ELABORATE
BUILDINGS AND OFFICES, THE COMPANY JET, HIRING OF
UNNECESSARY SUBORDINATES, UNDERTAKE UNPROFITABLE
MERGERS, ETC.
X-INEFFICIENCY
THE AGENT HAS MORE INFORMATION THAN THE PRINCIPAL
A PROBLEM
 TODAY, WE TIE PAY TO PROFIT IN AN
ATTEMPT TO REDUCE X-INEFFICIENCY
 WE INTRODUCE STOCK OPTION PLANS
TO REDUCE X-INEFFICIENCY
 BUT THIS CAN ALSO PROVIDE THE
INCENTIVE FOR THE CEO TO PUT A
COMPANY AT GREAT RISK IN ORDER TO
MAXIMIZE THE VALUE OF HER STOCK
HOLDINGS!
 X-INEFFICIENCY IS MORE LIKELY IN
OLIGOPOLY FIRMS AND MONOPOLY
FIRMS
 THIS CONDITION IS NOT LIKELY IN FIRMS
OPERATING IN A PERFECTLY
COMPETITIVE MARKET
 X-INEFFICIENCY CAN CAUSE FIRMS TO
HAVE LOWER STOCK VALUE --- BECAUSE
OF THE FAILURE TO MINIMIZE COST OR
TO SEEK COST REDUCING PRODUCTION
AND SALES METHODS
 THE TENDENCY TO LOWER STOCK
VALUE INDUCES OTHER FIRMS OR
COMBINATION OF FIRMS TO MAKE
“TENDER OFFERS”
 THE OFFER IS FOR HIGHER VALUE OF
THE STOCK IN THE X-INEFFICIENT FIRM
THAN THE STOCK MARKET VALUE OF
SUCH SHARES
 THE BUYERS THEN WREST CONTROL OF
THE FIRM --- IMPROVE ITS VALUE AND
RAISE THE STOCK MARKET VALUE
 THE SHARES ARE THEN TRADED FOR A GAIN
 THIS ACTION IS ALSO A CONTROL ON X-
INEFFICIENCY
 MISALLOCATION OF RESOURCES IN THE LONG
RUN MONOPOLISTIC COMPETITION FIRM WILL
CONTINUE TO EXIST
 HENCE THE LOWER ECONOMIC WELFARE
ASSOCIATED WITH MONOPOLISTIC
COMPETITION
JOAN ROBINSON (1903 -1983)
 LIKE A.C. PIGOU AND JOHN MAYNARD
KEYNES, ROBINSON IS A STUDENT OF
ALFRED MARSHALL
 SHE MADE GREAT CONTRIBUTIONS TO
NEOCLASSICAL MICROECONOMICS,
KEYNESIAN MACROECONOMICS, AND
POST-KEYNESIAN MACROECONOMICS
 HERE, WE COVER HER CONTRIBUTIONS
TO MICROECONOMICS
IMPERFECT COMPETITION: THE
CASE OF MONOPSONY
 THE BOOK --- ECONOMICS OF
IMPERFECT COMPETITION
 SHE DEVELOPS THE CASE FOR
MONOPSONY MARKETS IN THE INPUT
MARKET
 SHE PRIMARILY DEVELOPS THE CASE
FOR LABOR EXPLOITATION IN MARKETS
WITH IMPERFECT COMPETITION
 THE SINGLE BUYER OF LABOR CASE
MONOPSONY:SINGLE BUYER IN THE INPUT MARKET- SINGLE SELLER OF THE INPUT
CASE ---- VMP = VALUE OF MARGINAL PRODUCT, MC = MARGINAL COST, MR =
MARGINAL REVENUE
VMP = PRICE x INPUT MARGINAL PRODUCT
INPUT RETURN
MARGINAL INPUT COST
MC = MR DICTATES THE
EQUILIBRIUM, BUT THE RETURN
TO INPUT IS DERIVED FROM THE
SUPPLY FUNCTION AT THAT POINT
WHICH EQUALS THE MONOPSONY
RETURN TO INPUT
VMP RETURN
AVERAGE EXPENDITURE ON INPUT(SUPPLY)
MC = MR
MONOPSONY
RETURN
VALUE OF MARGINAL PRODUCT
MARGINAL REVENUE PRODUCT
LM,M
INPUT
UNDER THESE CONDITIONS, THE EQUILIBRIUM IS WHERE MC = MR --- INPUT LM,M IS
EMPLOYED --- THE VMP OF THAT EMPLOYMENT IS AT THE VMP RETURN --- BUT THE
PAYMENT TO THE INPUT(LIKE A WAGE IN THE CASE OF LABOR) IS THE MONOPSONY
RETURN ---- ROBINSON SUGGESTED THAT THE MONOPSONY EXPLOITATION IS
(MC=MR RETURN) – (MONOPSONY RETURN), AND MONOPOLY EXPLOITATION IS (VMP
RETURN) – (MC=MR RETURN)
MONOPSONY:SINGLE BUYER IN THE INPUT MARKET- COMPETITIVE SELLING OF
THE INPUT CASE ---- VMP = VALUE OF MARGINAL PRODUCT, MC = MARGINAL COST,
MR = MARGINAL REVENUE
INPUT RETURN
MARGINAL INPUT COST
VMP RETURN
MC = MR DICTATES THE
EQUILIBRIUM, BUT AGAIN, THE
RETURN TO INPUT IS DERIVED
FROM THE SUPPLY FUNCTION AT
THAT POINT WHICH EQUALS THE
MONOPSONY RETURN TO INPUT
AVERAGE EXPENDITURE ON INPUT(SUPPLY)
MC = MR
MONOPSONY
RETURN
VALUE OF MARGINAL PRODUCT
LM
INPUT
UNDER THESE CONDITIONS, THE EQUILIBRIUM IS WHERE MC = MR --- INPUT LM IS
EMPLOYED --- THE VMP OF THAT EMPLOYMENT IS AT THE VMP RETURN --- BUT THE
PAYMENT TO THE INPUT(LIKE A WAGE IN THE CASE OF LABOR) IS THE MONOPSONY
RETURN ---- ROBINSON SUGGESTED THAT THE MONOPSONY EXPLOITATION IS
(VMP RETURN) – (MONOPSONY RETURN) IN THIS CASE
ROBINSON WOULD SUGGEST THAT THE PURPOSE OF UNIONS
WOULD BE TO NEGOTIATE A WAGE UPWARDS FROM THE
MONOPSONY RETURN TO THE VMP RETURN
BY ORGANIZING, LABOR WOULD NEED
TO NEGOTIATE WAGE TO AT LEAST THE
VMP WAGE UNDER ONLY MONOPSONY
INPUT RETURN
MARGINAL INPUT COST
VMP WAGE UNDER ONLY MONOPSONY BUYING OF LABOR
VMP RETURN
AVERAGE EXPENDITURE ON INPUT(SUPPLY)
MC = MR
MONOPSONY
RETURN
VALUE OF MARGINAL PRODUCT
MARGINAL REVENUE PRODUCT
LM,M
OTHERWISE, THERE IS
NO REASON TO LIMIT
LABOR SUPPLY TO THE
MONOPSONISTIC
MARKET
INPUT
THE UNION WOULD HAVE TO MONOPOLIZE THE SELLING OF LABOR IN ORDER TO
OBTAIN BARGAINING POWER TO NEGOTIATE WAGE UPWARD ---- HENCE REDUCE
THE NUMBER OF WORKERS OFFERED AS CAN BE SEEN IN THIS CASE --MONOPSONY-MONOPOLY CONDITIONS EVOLVE
 ROBINSON LATER OFFERS A CRITIQUE
OF MARXIAN THOUGHT AND THE
MARXIAN VIEW OF THE DEMISE OF
CAPITALISM
 BUT SHE LATER BECOMES A CRITIC OF
CONVENTIONAL NEOCLASSICAL
ECONOMICS BECAUSE OF THE
EXPLOITATION CONDITIONS OF
IMPERFECT COMPETITION
 SHE IS ALSO CRITICAL OF THE
NEOCLASSICAL MONETARY THEORY
 ROBINSON DERIVES CASES AND THEN
REMARKS “THE LABORERS ARE
EXPLOITED BY THE CAPITALISTS AND
THE INDUSTRIAL MONOPOLISTS”
 THEN SHE TRACES HER CRITIQUE OF
THE MARGINALIST APPROACH
INCORPORATED IN THE NEOCLASSICAL
THEORY
 THEN SHE SIDES WITH THE POSTKEYNES CRITICS OF MACROECONOMIC
POLICY
BERGMANN’S ANALYSIS REFINED
ASSUMES MONOPSONY LABOR
MARKETS
WAGES
MARGINAL EXPENDITURE
MARGINAL
REVENUE
PRODUCT
SUPPLY OR AVERAGE EXPENDITURE
WOMEN’S LABOR
MEN’S LABOR
BERGMANN’S IDEA OF DISCRIMINATION
BECAUSE OF THE SHARPLY RISING MARGINAL
EXPENDITURE FUNCTION FOR WOMEN’ LABOR
Another look at “monopsony” //// return to input, w, is higher as
derived from demand (MRP) = supply than it is from marginal cost =
MRP
Supply
Monopsony >> a single buyer faces many sellers
Maximize profits at
TR(L) – W(L)L
TR/L = W(L) + W(L)/L
So new workers get W’(L)L
more than W(L)
Same for buying other
inputs
A monopsonist employer maximizes profits with employment L, that equates
demand, given by the marginal revenue product (MRP) curve, to marginal
cost MC at point A. The wage is then determined on the supply curve, at
point M, and is equal to w. By contrast, a competitive labor market would
reach equilibrium at point C, where supply S equals demand. This would
lead to employment L' and wage w'.