chapter 12--chapter 12chapter 12chapter 12chapter 12chapter 12chapter 12chapter 12chapter 12chapter...
TRANSCRIPT
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
1/48
Copyright © 2008 by the McGraw-Hill Companies, Inc. All
McGraw-Hill"IrwinManagerial #conomics,
Managerial Economics ThomaMaurininth edition
Copyright © 2008 by the McGraw-Hill Companies, Inc. AllMcGraw-Hill"IrwinManagerial #conomics,
Managerial Economics ThomaMaurininth edition
Chapter 12
Managerial Decisions forFirms with Market Power
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
2/48
Managerial EconomicsManagerial Economics
12-2
Market Power
• Ability of a firm to raise price
without losing all its sales
• Any firm that faces downward slopingdemand has market power
• Gives firm ability to raise price
above average cost & earn
economic profit (if demand & costconditions permit)
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
3/48
Managerial EconomicsManagerial Economics
12-3
Monopoly
• Single firm
• Produces & sells a good or service
for which there are no goodsubstitutes
• New firms are prevented from
entering market because of abarrier to entry
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
4/48
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
5/48
Managerial EconomicsManagerial Economics
12-5
Measurement of Market Power
• !erner inde" measures
proportionate amount by which
price e"ceeds marginal cost#
P MC
P
="erner inde#
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
6/48
Managerial EconomicsManagerial Economics
12-6
Measurement of Market Power
• !erner inde"
• $%uals !ero under perfect competition
• ncreases as market power increases• Also e%uals –1/E , which shows that theinde# (& market power), vary inverselywith elasticity
• The lower the elasticity of demand(absolute value), the greater the inde#& the degree of market power
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
7/48
Managerial EconomicsManagerial Economics
12-7
Measurement of Market Power
• $f consumers view two goods as
substitutes% crossprice elasticity
of demand (E XY ) is positive
• The higher the positive cross'priceelasticity, the greater thesubstitutability between two goods, &
the smaller the degree of marketpower for the two firms
ll
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
8/48
Managerial EconomicsManagerial Economics
12-8
Determinants of Market Power
• 'ntry of new firms into a marketerodes market power of e"istingfirms by increasing the number of
substitutes• A firm can possess a high degree of
market power only when strongbarriers to entry e"ist
• onditions that make it difficult fornew firms to enter a market in whicheconomic profits are being earned
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
9/48
Managerial EconomicsManagerial Economics
12-9
Common Entry Barriers
• 'conomies of scale
• hen long'run average cost declines overa wide range of output relative to
demand for the product, there may notbe room for another large producer toenter market
•arriers created by government• "icenses, e#clusive franchises
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
10/48
Managerial EconomicsManagerial Economics
12-
Common Entry Barriers
• $nput barriers
• ne firm controls a crucial input in theproduction process
• rand loyalties
• *trong customer allegiance to e#istingfirms may keep new firms from finding
enough buyers to make entry worthwhile
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
11/48
Managerial EconomicsManagerial Economics
12-
Common Entry Barriers
• onsumer lockin
• +otential entrants can be deterred ifthey believe high switching costs will
keep them from inducing many consumersto change brands
• Network e"ternalities
• ccur when value of a product increases
as more consumers buy & use it• ake it difficult for new firms to enter
markets where firms have established alarge network of buyers
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
12/48
Managerial EconomicsManagerial Economics
12-
Demand Marginal !e"enue for a
Monopolist • *arket demand curve is the firm+s demand
curve
• *onopolist must lower price to sell
additional units of output• arginal revenue is less than price for all butthe first unit sold
• ,hen MR is positive (negative)% demand is
elastic (inelastic)• -or linear demand% MR is also linear% has
the same vertical intercept as demand% & istwice as steep
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
13/48
Managerial EconomicsManagerial Economics
12-
Demand Marginal !e"enue for a
Monopolist #Figure 12$1%
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
14/48
Managerial EconomicsManagerial Economics
12-
&hort'!un Profit Ma(imi)ation for
Monopoly • *onopolist will produce a positive
output if some price on the demand
curve e"ceeds average variable cost
• Profit ma"imi.ation or loss
minimi.ation occurs by producing
/uantity for which MR = MC
M i l E iM i l E i
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
15/48
Managerial EconomicsManagerial Economics
12-
&hort'!un Profit Ma(imi)ation for
Monopoly • $f P > ATC % firm makes economicprofit
• $f ATC > P > AVC % firm incurs loss% but
continues to produce in short run
• $f demand falls below A0 at every
level of output% firm shuts down &
loses only fi"ed costs
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
16/48
Managerial EconomicsManagerial Economics
12-
&hort'!un Profit Ma(imi)ation for
Monopoly#Figure 12$*%
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
17/48
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
18/48
Managerial EconomicsManagerial Economics
12-
+ong'!un Profit Ma(imi)ation for
Monopoly • *onopolist ma"imi.es profit by
choosing to produce output where MR = LMC % as long as P ≥ LAC
• ,ill e"it industry if P
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
19/48
Managerial EconomicsManagerial Economics
12-
+ong'!un Profit Ma(imi)ation for
Monopoly #Figure 12$-%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
20/48
Managerial EconomicsManagerial Economics
12-
Profit'Ma(imi)ing .nput /sage
• Profitma"imi.ing level of input
usage produces e"actly that level
of output that ma"imi.es profit
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
21/48
Managerial EconomicsManagerial Economics
12-
Profit'Ma(imi)ing .nput /sage
• *arginal revenue product (MRP)
• MRP is the additional revenue attributable tohiring one more unit of the input
• ,hen producing with a single variable input#
• $mploy amount of input for which MRP = inputprice
• -elevant range of MRP curve is downward sloping,positive portion, for which ARP > MRP
TR MRP MR MP L
∆ ×∆
= =
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
22/48
Managerial EconomicsManagerial Economics
12-
Monopoly Firm0s Demand for
+abor #Figure 12$%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
23/48
Managerial EconomicsManagerial Economics
12-
Profit'Ma(imi)ing .nput /sage
• -or a firm with market power%
profitma"imi.ing conditions MRP
= w and MR = MC are e/uivalent
• hether . or " is chosen to ma#imi!eprofit, resulting levels of input usage,output, price, & profit are the same
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
24/48
Managerial EconomicsManagerial Economics
12-
Monopolistic Competition
• !arge number of firms sell adifferentiated product
• +roducts are close (not perfect)
substitutes• *arket is monopolistic
• +roduct differentiation creates a
degree of market power• *arket is competitive
• "arge number of firms, easy entry
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
25/48
Managerial EconomicsManagerial Economics
12-
Monopolistic Competition
• Shortrun e/uilibrium is identical to
monopoly
•
2nrestricted entry3e"it leads tolongrun e/uilibrium
• Attained when demand curve for each
producer is tangent to LAC
• At e%uilibrium output, P = LAC and MR = LMC
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
26/48
Managerial EconomicsManagerial Economics
12-
&hort'!un Profit Ma(imi)ation for
Monopolistic Competition #Figure 12$%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
27/48
Managerial EconomicsManagerial Economics
12-
+ong'!un Profit Ma(imi)ation for
Monopolistic Competition #Figure 12$3%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
28/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step 4# 'stimate demand e/uation
• /se statistical techni%ues fromhapter 0
• *ubstitute forecasts of demand'shifting variables into estimateddemand e%uation to get
Q a' bP
Rˆ ˆ a' a cM dP
here
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
29/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step 5# -ind inverse demand
e/uation
• *olve for P
a' P Q A BQ
b b
= =
1
Rˆ ˆ a' a cM dP , A a' b , B
b= = =
1here and
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
30/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step 6# Solve for marginal revenue
• hen demand is e#pressed as P = A + BQ, marginal revenue is
a' MR A BQ Q
b b
= =
22
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
31/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step 7# 'stimate AVC & SMC
• /se statistical techni%ues fromhapter 12
SMC a bQ cQ2
2 3
AVC a bQ cQ2
=
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
32/48
Managerial EconomicsManagerial Economics
12-
• Step 8# -ind output where MR = SMC
• *et e%uations e%ual & solve for Q5
• The larger of the two solutions is the
profit'ma#imi!ing output level• Step 9# -ind profitma"imi.ing price
• *ubstitute Q5 into inverse demand
P 5 = A + BQ5
Q5 & P 5 are only optimal if P ≥ AVC
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
33/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step :# heck shutdown rule
• *ubstitute Q5 into estimated AVCfunction
• f P 5 ≥
AVC 5 , produce Q5 units ofoutput & sell each unit for P 5
• f P 5
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
34/48
Managerial EconomicsManagerial Economics
12-
.mplementing the Profit'Ma(imi)ing
4utput Pricing Decision• Step ;# ompute profit or loss
• +rofit = TR TC
• f P ! AVC , firm shuts down & profitis 'T"C
* *
P Q AVC Q T"C × ×
* ( P AVC )Q T"C
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
35/48
Managerial EconomicsManagerial Economics
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• A.tec possesses market power via
patents
• Sells advanced wireless stereo
headphones
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
36/48
Managerial EconomicsManagerial Economics
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• 'stimation of demand & marginal
revenue
41, 000 500 0.6 22.5= − + − RQ P M P
41, 000 500 0.6(45, 000) 22.5(800)= − + − P
50, 000 500= − P
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
37/48
Managerial EconomicsManagerial Economics
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• Solve for inverse demand
50, 000 500
500 500
Q P − −=
− −
50,000
500 500
Q P
−+ =
− − 1100
500 P Q= −
50, 000 500Q P − = −
100 0.002Q= −
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
38/48
a age a co o csa age a co o cs
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• etermine marginal revenue
function
100 0.002 P Q= −
100 0.004 MR Q= −
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
39/48
gg
12-
Demand Marginal !e"enue for
6)tec Electronics #Figure 12$8%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
40/48
gg
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• 'stimation of average variable cost
and marginal cost
• 3iven the estimated AVC e%uation4228 0.005 0.000001 AVC Q Q= − +
• *o,
228 (2 0.005) (3 0.000001)SMC Q Q= − × + ×
228 0.01 0.000003Q Q= − +
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
41/48
gg
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
•
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
42/48
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
43/48
gg
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• Pricing decision
• *ubstitute Q* into inverse demand
$88=
* 100 0.002(6, 000) P = −*
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
44/48
gg
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• Shutdown decision
• ompute AVC at 5,222 units4
$34=
$88 $34 P AVC = > =6ecause , A!tec shouldproduce rather than shut down
2* 28 0.005(6, 000) 0.000001(6, 000) AVC = − +*
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
45/48
gg
12-
Ma(imi)ing Profit at 6)tecElectronics7 6n E(ample
• omputation of total profit
TR TVC TFC π = − −
($88 6, 000) ($34 6, 000) $270, 000= × − × −
$528, 000 $204, 000 $270, 000= − −
$54,000=
( * *) ( * *) P Q AVC Q TFC = × − × −* * * *
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
46/48
gg
12-
Profit Ma(imi)ation at 6)tec
Electronics #Figure 12$19%
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
47/48
gg
12-
Multiple Plants
• $f a firm produces in 5 plants% 6 & B
• Allocate production so MC A = MC B
• ptimal total output is that for which MR = MC T
• -or profitma"imi.ation% allocate
total output so that
MR = MC T = MC A = MC B
Managerial EconomicsManagerial Economics
-
8/19/2019 Chapter 12--Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12Chapter 12
48/48
6 Multiplant Firm #Figure 12$11%