Econ 4001.01 1st Edition Lecture 17Outline of Last Lecture II. Market Power and Monopolya. Market Power definitionIII. Characteristics of a MonpolyIV. Example Ford MotorsV. Information on Patent and TrademarksVI. Simple Revenue for a MonopolistVII. Profit Maximization for a MonopolistVIII. Learner Impacts on PricingOutline of Current Lecture IX. Learner Indexa. Example with calculationsX. Managing Firms with Market PowerXI. Welfare Implications of Monopoly PowerXII. Monopsony- Market with One BuyerXIII. Do Governments Care about Monopsony Power?Current Lecture- Learner indexo Example: Price per daily dose is $3.50 and marginal cost is $0.30-0.40o So plug it in to the learner index to get the range of demand elasticity (3.50-0.30)/3.50= 0.914  -1/0.914= -1.09 (3.50-0.40)/3.50=0.886  -1/0.886= -1.13 The range is from -1.09 to -1.13- Managing Firms with Market Powero Monopolists with multiple producing locations have to decide how to allocate productso Firms with some market power (as in monopolistic competition) need to decide how to price productso Firm with dominant market share (oligopoly) need to decide whether to competeor colludeo Producing output at Multiple Facilities: total output is found where MR=MC (for all sites) Output for each plant is chosen such that MC for each site is the sameThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Example of Firm with Small Monopoly Powero Elasticity of demand for food items is very small- about -0.10 to -0.20o For an individual store ED= -10o What is their learner index? What should their markup be? L=(P-MC/P)= -1/ED Plug in the numbers and get MC or P= 1.11 So markup 11% to make a small profit- Welfare Implications of Monopoly Powero Consumer surplus is transferred to monopolyo Dead-weight loss (P is too high and Q too low)o Rent seeking behavior- Firms may compete wastefully for market power; firms with monopoly may spend wastefully to retain their monopoly Example: paying people not to come into the business/sponsor politiciansthat will enact statuary monopoly (government secured monopoly) Governments do not like monopolies and this wasteful spending so the government can do some things to control it Government can set a max or price ceiling and force the monopolist to “give back” some surplus and restore some type of equality If the government knows the MC of the monopolist then it can set a max price at the efficient level as long as that is above ATCo Natural Monopolies In this case, government cannot set a max price=MC as that price is belowATC  therefore, the best max price is where demand crosses ATC- Monopsony- Market with One Buyero Monopsony power= the buyer’s ability to impact the market price (by insisting ona lower price than in perfect competition)o Marginal value= additional benefit to buyer from obtaining product at lower price than max WTPo ME= Marginal Expenditure and MV= Marginal Valueo AE=Average Expenditure and AV= Average Valueo Buyer in competitive market sees a horizontal ME curve- its quantity does not affect market price BUT in a monopsony as the sole buyer increases purchases, it drives up market price and therefore, it has incentive to purchase lower Q (ME upward sloping and MV is downward sloping)o Monopsony buyer chooses quantity at which MV equals ME and drops down to the AE (supply) curve to find the price it will offero Compared to monopoly, in a monopsony equilibrium quantity is too low for both buyer and seller and therefore there is a dead weight loss- Do Governments Care about Monopsony Power?o DWL from quantity being too low is always a concern of government so they mayoppose monopsonyo However, surplus is transferred from producers to consumers so governments may be okay with thato One important monopsony situation is the labor market; if there is a market witha single buyer for labor, firms benefit, DWL is created and wages are lowered Example: a town with only one company (a small sawmill town/textile factory) so the only options were to stay and work for that company or leave Therefore the company has control because it is the only buyer of