Econ 410: Micro TheoryMonopoly, Monopsony, and Monopolistic CompetitionWednesday, November 28th, 2007Announcement Bennett Harman, Deputy Assistant U.S. Trade Representative, is speaking on campus tomorrow. He is the lead trade negotiator for Latin America, and has been heavily involved in a variety of recent trade negotiations. The talk will be geared especially for UNC undergraduates Thursday, 3:30 - 4:30 pm 211 Gardner HallSocial Costs of Monopoly We know from last time that monopoly power results in: Higher prices for a good than under competition Lower quantities sold However, does monopoly power make consumers and producers in the aggregate better or worse off? To find out, we can compare producer and consumer surplus between a competitive market and a monopolySocial Costs of MonopolyBALost Consumer SurplusBecause of the higher price, consumers lose A+B and the producer gains A-C.CQuantityAR=DMRMCQCPCPmQm$We know that a perfectly competitive firm will produce where MC = D  PCand QCBut, a monopoly produces where MR = MC, getting their price from the demand curve  PMand QMDeadweight loss is equal to B+C.Sample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QWhat level of output maximizes the sum of consumer and producer surplus?a) 0 b) 30 c) 45 d) 60e) None of the aboveSample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QWhat level of output maximizes the sum of consumer surplus & producer surplus?a) 0 b) 30 c) 45 d) 60e) None of the aboveQuantity where P=MCSample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QWhat is the profit maximizing level of output? a) 0 b) 30 c) 45 d) 60e) None of the aboveSample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QWhat is the profit maximizing level of output? a) 0 b) 30 c) 45 d) 60e) None of the aboveQuantity where MR=MCSample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QAt the profit maximizing level of output, what is the level of consumer surplus? a) 0 b) 1,800 c) 2,700 d) 3,600 e) 4,800Sample Exam QuestionMaui Macadamia Inc. has a monopoly in the macadamia nut industry. Their demand, marginal revenue and marginal cost curves are: P = 360 - 4Q MR = 360 - 8Q MC = 4QAt the profit maximizing level of output, what is the level of consumer surplus? 3024036021303602121MMMPQPPa) 0 b) 1,800 c) 2,700 d) 3,600 e) 4,800Social Costs of Monopoly The social cost of a monopoly is likely to exceed deadweight loss due to rent seeking behavior Economic rents are those profits above and beyond a “normal” level Rent Seeking Firms may spend money to gain or continue to hold monopoly power Examples of rent seeking behavior Lobbying AdvertisingSocial Costs of Monopoly Example – Phone Lobbies“Phone Giants Are Lobbying Hard To Block Towns' Wireless Plans”By JESSE DRUCKER and LI YUAN, THE WALL STREET JOURNALJune 23, 2005“Around the country, governments are contracting with providers other than the local telephone or cable companies to build or run wireless networks using Wi-Fi technology or fiber-optic cables. Wi-Fi provides high-speed access to the Web. Traditional telecom providers view such projects as a threat and are pushing for laws to curtail them. While the phone and cable companies control the valuable 'last mile' wired connections into homes and offices, the wireless networks bypass those lines and can connect directly to the networks of long-distance companies or fiber-optic providers.” Are phone companies participating in rent-seeking behavior? Why or why not?Natural Monopolies A natural monopoly is a firm that can produce the entire output of an industry at a cost lower than what it would be if there were several firms Usually arises when there are large economies of scale or high fixed costs If this type of market is split into two firms: Higher average costs for each firm will result than when only one firm is producingMonopsonies A monopsony is a market in which there is a single buyer Similarly, an oligopsony is a market with only a few buyers Monopsony power is the ability of the buyer to affect the price of the good  Monopsony buyers pay less than the price that would exist in a competitive market These buyers typically choose to buy until the benefit from last unit equals that unit’s costMonopsonies How does a monopsonist compare with a buyer in a competitive market? A competitive buyer is a price taker P = Marginal expenditure = Average expenditure D = Marginal value For a monopsonist, the decision to buy an extra unit raises the price paid for all units. How are monopsonists are similar to monopolists? The marginal expenditure for an extra unit of a good exceeds price for a monopsonist A few large buyers in an industry is a more common case than a pure monopsonyMonopsony Power The degree of monopsony power for a firm depends on three factors: Number of buyers The fewer the number of buyers, the less elastic the supply and the greater the monopsony power Interaction Among Buyers The less competition, the greater the monopsony power Elasticity of market supply If supply is very elastic, markdowns below marginal value will be small The more inelastic the supply, the more monopsony powerMonopolistic Competition So far, we have discussed extreme cases of market structures Perfect Competition, Monopoly, Monopsony We can now begin to analyze markets that combine various aspects of all of these industries A monopolistically competitive industry is characterized by: A large number of firms Free entry and exit Differentiated productsMonopolistic Competition In this type of industry, the amount of monopoly power a firm has depends on the