Download Imperfect Competition - Department of Agricultural Economics

Market
Equilibrium and
Product Price:
Imperfect Competition
Chapter 9
Discussion Topics
Market structure characteristics
Imperfect competition in selling
Imperfect competition in buying
Market structure in livestock industry
Governmental regulatory measures
Market Structure Characteristics
Number of firms and
size distribution
Product
differentiation
Barriers to entry
Picture here tells a
tale of two markets
(no. 2 yellow corn vs.
farm equipment)
Pages 145-146
Market Structure Characteristics
Number of firms and
size distribution
Product
differentiation
Barriers to entry
Existing economic
environment (the
conditions of supply
and demand)
Pages 145-146
Perfect Competition
 Up to now we have been assuming the firm and market
reflect the conditions of perfect competition… farmers
come close as anybody to meeting these conditions.
 A large number of small firms (2 million farms)
 A homogeneous product (no. 2 yellow corn)
 Freely mobile resources (no barriers to entry, no patents,
for example, as well as no barriers to exit)
 Perfect knowledge of market conditions (outlook
information from government and university sources, for
example, The Texas Agricultural Extension System or the
U.S. Department of Agriculture)
Merging Demand and Supply
Price
D
S
Chapters 6,8
PE
Chapters 3,4,5
Chapter 8
QE
Quantity
Firm is a “Price Taker” Under
Perfect Competition
Price
The Market
D
S
The Firm
Price
AVC
MC
PE
QE
OMAX
Quantity
If Demand Increases……
The Market
Price
D
The Firm
D1
S
Price
AVC
MC
PE
QE
10 11
Quantity
If Demand Decreases……
The Market
Price
D2
D
The Firm
S
Price
AVC
MC
PE
QE
9 10
Quantity
Firm is a “Price Taker” in the
Input Market
Price
Labor Market
D
S
Price
The Firm
MVP
MIC
PE
QE
LMAX
Quantity
Firm is a “Price Taker” in the
Input Market
Wage
rate
Labor Market
D
S
Price
The Firm
MVP
MIC
PE
QE
LMAX
Quantity
Imperfect Competition in Selling
Imperfect Competition
 Many of the markets in which farmers buy
inputs and sell their products however do not
meet these conditions
Imperfect Competition
in Selling
Imperfect competitors selling a differentiated product
have a downward sloping demand curve since now they can
have an influence on price (e.g., they can differentiate product)
(unlike perfectly competitive firms which have a perfectly
elastic horizontal demand curve because they and buyers
Page 150
cannot influence price)
The marginal revenue in this instance also is downward
sloping, and goes to zero at the point where total revenue peaks
Page 150
Types of Imperfect Competitors
on the Selling Side
1. Monopolistic competition
2. Oligopoly
3. Monopoly
Let’s start here…
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 off the downward
sloping demand curve
Page 148-151
Short run profits. The firm
produces QSR 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 150
Short run loss. The firm suffers a
loss in the current period
following the same strategy of
operating at QSR given by
MC=MR at point E.
Page 150
At quantity QSR, average total
cost (ATCSR) is greater than
PSR, which creates the loss
depicted above…
Page 150
In the long run, profits are bid
away as more firms enter the
market. Or losses will no longer
exist as firms leave 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 151
Top 10 Burger Restaurants
Rank
Brand
Market Share
Advertising
Mil. Dol.
1
McDonald’s
42.8%
$571.7
2
Burger King
20.2
407.5
3
Wendy’s
11.5
188.4
4
Hardee’s
5.7
50.5
5
Jack in the Box
3.6
51.2
6
Sonic Drive-ins
3.3
28.1
7
Carl’s Jr.
1.9
34.3
8
Whataburger
1.1
6.7
9
White Castle
1.0
10.1
10
Steak n Shake
0.9
5.7
Total Top 10
92.0%
$1,347.4
Total Market
$42.3 billion
$1,359.7
Imperfect competition (monopolistic
competition) you face weekly
Oligopolies
 A few number of sellers,
each of which is large
enough to have influence
on market volume and
price
 Non-price competition
between oligopolists
 Match price cuts but not
price increases by fellow
oligopolists
 Like monopolistic
competitors, they have
some ability to set market
prices
Pages 152-155
Examples of Oligopolists
Farm machinery manufacturers
Domestic automobile industry
Domestic airline industry
Pesticide and fertilizer industry
Products sold are largely identified
or differentiated by company
brand or name.
Demand curve DD represents
the case when all oligopolists
move prices together and share
the market.
Page 154
Why? Rival
oligopolists will
match all price
cuts but not all
price increases in
the short run
because they want
to maintain market
share.
Demand curve dd
represents the
case when a single
firm changes its price
above Pe at point 1.
This situation leads to
a kinked demand
curve d1D and a
discontinuous
marginal revenue
curve.
Note: dd is more
elastic than DD
Page 154
Meeting demand
along the lower
segment of the
kinked demand
curve, the firm is
maintaining its
market share.
This situation
also explains
why there is a
tendency for
prices to remain
at Pe
Page 187
Note that shifting MC
curves reflecting
technological advances
will not affect PE and QE.
(MC drops from point 3
to point 4).
This situation explains
why oligopolistic
markets are
characterized by
infrequent price
changes. Firms usually
do not change their
price-quantity
combinations in
response to small shifts
Page 187
of their cost curves.
Monopoly (not the Parker Brothers Game)
 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 155-158
Total revenue is equal
to the area 0PECQE,
which forms the blue
box to the left…
Notice the monopoly,
like the previous forms
of imperfect competition,
produces where MC=MR
(point A), but then reads
up to the demand curve
(point C) when setting
price PE.
Page 156
Total variable costs for
the monopolist is equal
to area 0NAQE, or the
yellow box to the left.
Page 156
Total fixed costs for the
monopolist is equal to
area NMBA, or the green
box to the left…
Page 156
Total cost is therefore equal
to area 0MBQE, or the
green box plus the yellow
box to the left
Page 156
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 156
Let’s compare a monopoly with
perfect competition from an
economic welfare perspective
Page 157
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 157
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 157
Perfect Competition Case
Total economic surplus
under perfect competition
is therefore equal to the
blue and green triangles
to the left, or the sum of
areas 1 through 9.
Page 157
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, 4 and 5 under
a monopoly. They are
paying a higher price PM
and they are receiving a
smaller quantity QM.
Page 157
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 157
Monopoly Case
Finally, society as a whole
would be economically
worse off by areas 1+2. This
magnitude of loss is called
a dead weight loss. Dead weight
loss may not necessarily be large.
This measure reflects the cost
to society due to the existence of
a monopoly in lieu of perfect
competition.
Page 157
Summary of imperfect competitors from a selling perspective
Page 157
Imperfect Competition
in Buying
Types of Imperfect Competitors
on the Buying Side
1. Monopsony
2. Monopsonistic competition
3. Oligopsony
Let’s start here…
Monopsonies
 Single buyer in the market
 Focus is on the marginal
input cost of purchasing an
addition unit of resources
 Will equate MRP=MIC
when making buying
decisions
 As long as MRP>MIC, the
monopsonist makes a
profit
Page 158-160
Buying Decisions by Perfect Competitors
Marginal revenue product
same as marginal value
product under perfect
competition.
Page 160
Monopsonist now facing
upward sloping MIC since
it can influence market price
Page 160
Buying Decisions by a Monopsonist
The monopsonist makes decisions
along the marginal revenue
product curve. The firm will
equate MRP=MIC at point A
and decide to buy quantity QM
Page 161
Buying Decisions by a Monopsonist
This situation (imperfect competition in buying) causes price to
fall from PPC to PM which is referred to as monopsonistic
Page 161
exploitation. Economists wish to measure this price difference.
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 161
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 161
Various segments of the livestock industry
exhibit several forms of imperfect competition.
Page 162
Governmental Regulatory
Measures
Various approaches have been taken over time to
counteract adverse effects of imperfect competition
in the marketplace. These approaches historically include
1. Legislative acts passed by Congress, including various
antitrust laws
2. Price ceilings
3. Lump-sum tax
4. Minimum prices or floors
Pages 162-166
#1:Legislative Acts
Sherman Anti-trust Act 1890
Clayton Act 1914
Packers and Stockyards Act 1921
Capper-Volstead Act 1922
Cooperative Marketing Act 1926
Robinson-Patman Act 1936
 Agricultural Marketing Agreement Act 1937
#2: Implications of a Price Ceiling
Without regulatory interference,
the monopolist will equate MR
and MC at point C, produce QM
and charge price PM.
Page 164
#2: Implications of a Price Ceiling
The monopolist’s profit is
equal to the blue box.
Page 164
#2: Implications of a Price Ceiling
If the government
imposes a price ceiling
PMAX, the demand curve
is given by PMAXED. This
demand curve also is the
MR curve up to Q1.
Beyond Q1, the segment
FG becomes the MR
curve.
Page 164
#2: Implications of a Price Ceiling
The price ceiling has the
effect of causing the
monopolist to produce
more (Q1>QM) at a lower
price (PMAX<PM).
Page 164
#2: Implications of a Price Ceiling
The monopolist’s profit
falls to area IPMAXEH or
the green box above.
Page 164
#3: Implications of Lump-Sum Tax
The monopolist equates
MC=MR at point F,
producing QM, and reading
up to the demand curve at
point B, will charge PM.
Page 165
#3: Implications of Lump-Sum Tax
The lump-sum tax on the
monopolist raises the firm’s
average total costs from
ATC1 to ATC2. This tax lowers
the monopolist’s profit
from APMBC to EPMBT,
but does not change
its level of output or price.
Page 165
#3: Implications of Lump-Sum Tax
The loss in profit
is area AETC
or blue box above.
The lump-sum tax on the
monopolist raises the firm’s
average total costs from
ATC1 to ATC2. This lowers
the monopolist’s profit
from APMBC to EPMBT,
but does not change
its level of output or price.
Page 165
#4: Implications of Minimum Price
Without a minimum price,
the monopsonist would equate
MRP=MIC and employ QM
units of the input and pay PM.
Page 166
#4: Implications of Minimum Price
If a minimum price PF is
imposed (think of a minimum
wage rate), the monopsonist’s
MIC curve would be PFDCB.
Now, the firm would actually
employ more of the resource.
Page 166
Summary
 Unlike perfect competition, imperfect
competitors have ability to influence
price.
 Monopolistic competitors try to
differentiate their product.
 Monopolists are the only seller in their
product market. Monopsonists are the
only buyer.
 Oligopolies are a few number of sellers
while oligopsonies are a few number of
buyers.
 Know the economic welfare
implications of imperfect competition
at least on the selling side.