T2: 1.3: Factor markets in imperfect competition Flashcards
How will a monopoly act in the input market?
They will hire more units of input until MC=MR
Monopoly in output market: 4 assumption?
- Firm is monopolist in output y
- Only one FofP, x
- Production function given by y=f(x)
- Rev: R(y)=p(y).y
What is marginal revenue product?
How much revenue increases due to an increase in the FofP (prove it’s eqn)
Why, compared with competitive case, will monopolies buy LESS of a FofP?
Each extra unit is less valuable because it reduces price of output by increasing quantity of output, tf monopolists hold down supply and hire less FofP
Assuming a perfectly competitive factor market, tf price fixed at w, up till what point will a) a comp firm, and b) a monopoly firm, hire units of x?
a) until pMP(x(c))=w, ie. MRPx(c)=w
b) until MRPx(m)=w
What does the difference between x(m) and x(c) represent?
it reflects the difference between elasticity of demand for product (see and learn diagram)
MONOPSONY: What is it?
Assumes one sole buyer therefore they have market power (supermarkets to farmers sometimes)
MONOPSONY: 3 assumptions for analysis?
- Monopsonist sells into a competitive market
- They produce according to y=f(x)
- x is the factor of production
Note
The price (w) of FofP(x) depends on the Q demanded by the monopsonist according to the inverse supply function w(x) (UWS). Since firm sells into PC market, can only influence FofP price
MONOPSONY: What is the optimising condition?
MB=MC(of hiring additional FofP)
See
Slides 22-23 and 24-27
What are upstream and downstream monopolies?
When there monopolies in both output and factor markets
Explain the model assumptions for US and DS monopolies and how the steps work, starting with the USM?
- USM produces quantity x at MC=c and sells to the DS monopolist at price=k
- DSM produces y according to y=f(x) such that y=x (ie. DSM monopolist doesn’t change/add to product)
- DSM sells y to public facing an inverse D function p(y)=a-by
- DSM has no additional costs other than paying for FofP, x at price k
Draw diagram for USM and DSM operating
now (notes)
How do we tell if having 2 separate monopolies is good ? What do we find? Why does this happen?
By comparing it with the situation of the 2 monopolies merging, we can see that by having 2 separate monopolies, y* is half what it would be in an integrated monopoly.
Each step of monopoly reduces output by half. This generates a “double mark-up” in price, and leads to prices that are too high even for their profit maximisation (see diagram in slides!!!)
