Lecture 19Long-Run Factor DemandLabor Demand of a Thread MillMarket Demand for LaborFirm Demand for LaborMarket Demand for LaborMonopolies and Factor Markets How Labor Demand Varies with Market StructureEffects of Output Market Structure on Labor Market EquilibriumApplication Union Monopoly PowerMonopoly in Related MarketsDouble Monopoly MarkupVertical OrganizationMonopsonyMonopsonyMonopsonyMonopsonyWelfare Effects of MonopsonyWeyerhaeuserWelfare Measures in a Multimarket FrameworkDistribution of Welfare in a Multimarket ModelSummary: Competitive Factor MarketEffect of Monopolies on Factor MarketsVertical IntegrationMonopsonyLecture 19Factor Markets and Vertical Integration• Competitive factor market• Effect of monopolies on factor markets• Vertical integration • MonopsonyLong-Run Factor Demand• Derived demand• Factor market demand curve• Marginal revenue product• Market demand for laborLabor Demand of a Thread MillMarket Demand for LaborFirm Demand for LaborMarket Demand for LaborMonopolies and Factor Markets• Role of market power1(1 )LLMRP P MPε=+• Competitive market model• Monopolized factor market and competitive output market• Monopolized factor and output markets●How Labor Demand Varies with Market StructureEffects of Output Market Structure on Labor Market EquilibriumApplication Union Monopoly PowerMonopoly in Related Markets• Double monopoly markup• Vertical integration• Premerger and postmerger equilibriumDouble Monopoly MarkupVertical OrganizationMonopsony• Comparison to competitive price• Derivation of M.E.• Welfare effects of monopsony• Monopsony price discriminationMonopsonyMonopsonyMonopsonyWelfare Effects of MonopsonyWeyerhaeuser• Alleged foreclosure• Alleged predatory pricing• Is it rational?• Is recoupment possible?Welfare Measures in a Multimarket Framework• Consumer surplus: intermediate market• Producer surplus: intermediate market• Market-, sector-, and economy-wide analysisDistribution of Welfare in a Multimarket ModelSummary: Competitive Factor Market• Firms maximize profit by ensuring that MRP equals factor price• Marginal revenue = market price, so MRP is market price x marginal product• Long-run factor demand flatter than short-run demand• Market demand for factor reflects output levels in product marketsEffect of Monopolies on Factor Markets• Consumer demand falls when prices rise above marginal cost in an output market or factor market• Reduction in input quantity reduces output; reduction in output reduces demand for inputsVertical Integration• Companies may vertically integrate, quasi-vertically integrate, or buy from a factor market, usually based on profitability• Vertical integration is costly, but potential benefits include—– lowers transaction costs– ensures steady supply– avoids government restrictions– extends market power to another market– eliminates market powerMonopsony• Sets price so that marginal value equals marginal expenditure• Results of monopsony paying price below the competitive level:– sells fewer units than in competitive market– producers of factors are worse off– monopsony earns higher profits– society suffers deadweight loss– (monopsony may also price
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