EMI1 Flashcards
What is the equation for the Lerner Index and what does this represent?
-L = (P-MC)/P = -1/E, where E = elasticity.
-This represents the price-cost margin, an index of strength on monopoly power, where a higher margin means a stronger monopoly.
Who are the three main authors of DWL and what are their findings?
-Harberger (1956) - Using USA data, the size of DWL loss from monopoly is <0.1% of GDP, meaning that the cost of fighting monopolies is not worth the reward society will gain.
-Cowling/Mueller (1978) - DWL = Total Profit/2, which estimates to be between 3-6% of GDP, which would likely be worth fighting against.
-James/McHardy (1997) - DWL/Sales Value = -1/2E, as they argued that profits are hard to observe as accounting reports do not measure economic profit.
What is the problem of rent-seeking and who are the main two authors?
-Main two authors are Tullock (1967) and Posner (1975).
-They argued that firms may waste resources in order to gain monopoly profits. However, could also provide benefits, such as innovation.
What did Schumpeter (1943) argue?
He argued for the Creative gale of destruction. This occurs because profits are driving innovation, meaning that a static monopoly is not something to worry about as the picture is constantly changing.
What is the problem of x-inefficiency and who is the main author?
-The main author is Leibenstein (1978).
-He argued that if a monopoly is not facing competitive pressure then they have fewer incentives to keep costs at an efficient level.
What is 1st-degree price discrimination?
-The price is the MC for each unit, meaning consumer surplus is 0 as the producer has captured the whole surplus, therefore, there is no DWL.
What is 2nd-degree price discrimination (2 types)?
-2-part tariff: The firm charges an access fee (equal to the producer surplus) and a per unit charge of MC.
-Bundling: The firm wants to encourage self-selection by charging a set menu. Therefore, they decrease the price for the low-value consumer and overall profit will increase (can demonstrate on a diagram by splitting up into parts).
