Transcript Competition and Monopoly

“The Economic
Way of Thinking”
11th Edition
© 2006 Prentice Hall Business Publishing
Chapter 8:
Competition
and Monopoly
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Chapter 8 Outline
• Introduction
• Who Qualifies as a Monopolist?
• Alternatives, Elasticity and Market Power
• Privileges and Restrictions
• Price Takers and Price Searchers
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The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
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Chapter 8 Outline
• Price Takers’ Markets and “Optimal” Resource
Allocation
• Competition as a Process
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Heyne/Boettke/Prychitko
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Introduction
• Reality
– Sellers set the majority of the prices.
– Buyers set most of the rest.
– A few are set by negotiations between buyers and
sellers.
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Introduction
• Market transactions are an activity.
– Scarcity is a logical condition, not a material one.
– Making choices involves rationing and prioritizing.
– In our interactions with others we engage in
competition.
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Who Qualifies as a Monopolist?
• Monopoly
– One seller
• Question
– Was telephone service a good example prior to
cellular phones?
• Answer
– No - If phone service is broadly defined as
“communication services”
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Who Qualifies as a Monopolist?
• Question
– Is a grocer a monopolist?
• Answer
– Yes – If their services are narrowly defined as a
provider to people with no alternative source of
groceries.
• The word “monopoly” is extraordinarily
ambiguous.
– Everyone or no one is a sole seller depending on
how we define the commodity being sold.
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Alternatives, Elasticity and Market Power
• Question
– What problems result from a single seller?
• Single sellers face no competition
• Buyers have no substitutes
– Can be taken advantage of more easily
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Alternatives, Elasticity and Market Power
• Price Elasticity of Demand
– Helps explain how much control suppliers have over
price.
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Alternatives, Elasticity and Market Power
P
Does not exist
Q
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Alternatives, Elasticity and Market Power
P
Less than
perfectly elastic
demand
Q
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Alternatives, Elasticity and Market Power
P
Less elastic
demand
Q
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Alternatives, Elasticity and Market Power
• More substitutes – more elastic the demand
• Market Power
– A matter of degree
– Inversely related to elasticity of demand
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Privileges and Restrictions
• Monopolies may result from acts of the state.
– Allow some to engage in an activity but not others
– Tax and restrict some sellers but not others
– Grant protection or assistance to some but not others
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Privileges and Restrictions
• Governments impose restrictions on entry in the
name of:
–
–
–
–
–
Public safety
Fair competition
Stability
National security
Efficiency
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Privileges and Restrictions
• Questions
– Who benefits from these restrictions?
– Any losers?
• Monopolist (a possible definition)
– Any individual or organization operating with the
advantage of special privileges granted by the
government
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Privileges and Restrictions
• Question
– What firms would be a monopolist using this
definition?
• Oligopolies
– Few sellers
• Questions
– Few sellers of what?
– How do you define the commodity?
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Price Takers and Price Searchers
• Questions
– Does US Steel establish the price for its product?
– Does a farmer establish the price for his/her product?
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Price Takers and Price Searchers
• Question
– What would happen if a farmer tried to sell his product
above the current market price of $3.38 ¾?
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Price Takers and Price Searchers
P
3.50
Won’t sell any
Sell all he wants
3.48 3/4
D
Sell all he wants
3.46
Q
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Price Takers and Price Searchers
• The farmer is a price taker.
– He cannot affect the price
– He can sell all he wants at the market price
– He will probably not sell any at a price above the
market price
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Price Takers and Price Searchers
• Normal Seller
– Sells more at a lower price
– Sells less at a higher price
• These firms are price searchers
– They search for the price that is most advantageous
to them
– They have some market power
• Inversely related to elasticity of demand
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Price Takers and Price Searchers
P
Demand curves
faced by price
searchers
Q
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Price Takers’ Markets and
“Optimal” Resource Allocation
• Questions
– Are monopolists price searchers?
– Do they face competition?
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Price Takers’ Markets and
“Optimal” Resource Allocation
• Scenario
– Let’s look at the demand and supply curves for house
painters during a summer.
– This will be used to illustrate the advantages of the
price takers assumption.
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Price Takers’ Markets and
“Optimal” Resource Allocation
• Remember:
– Supply curves are marginal opportunity cost curves.
– Marginal opportunity cost curves for any individual will
slope upward to the right.
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Price per Hour
Price Takers’ Markets and
“Optimal” Resource Allocation
24
22
20
18
16
14
12
10
8
6
4
2
0 0
S= MC
Sometimes
called the
“optimal
allocation of
resources”
D
1
2
3
4
5
6
7
8
9
10
11
Thousands of Hours
of House Painting
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Price per Hour
Price Takers’ Markets and
“Optimal” Resource Allocation
24
22
20
18
16
14
12
10
8
6
4
2
0 0
S= MC
Gain from
trade
foregone
D
1
2
3
4
5
6
7
8
9
10
11
Thousands of Hours
of House Painting
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Price Takers’ Markets and
“Optimal” Resource Allocation
Prices fixed above marginal cost rule out
some mutually advantageous exchange
opportunities.
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Price Takers’ Markets and
“Optimal” Resource Allocation
• In a price takers’ market:
– No seller can set and keep price above marginal cost
• In a price searchers’ market:
– They can do so.
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Competition as a Process
• In economics, competition means a state of
affairs.
• A competitive market is said to exist when…
– There are a large number of buyers and sellers, and
nobody possesses market power
– Market participants possess full and complete
information of alternatives
– Sellers produce a homogeneous product
– There is costless mobility of resources
– The economic actors are price takers
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Heyne/Boettke/Prychitko
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Once Over Lightly
• Monopoly means one seller.
• Narrowly defined, every seller is a monopolist.
• The word monopoly is ambiguous.
• No seller has unlimited power over buyers.
• Elasticity of demand reflects the number of
substitutes.
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Once Over Lightly
• The more substitutes a product has the more
elastic the demand for a product.
• Some companies are granted special privileges
that restrict their competition.
• Competition makes some sellers price takers
while others with less competition are price
searchers.
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Heyne/Boettke/Prychitko
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End of Chapter 8
© 2006 Prentice Hall Business Publishing
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Heyne/Boettke/Prychitko
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