Discuss Multi-Plant monopoly.
Introduction:
In this topic, we shall examine the case of a monopolist who produces a homogeneous
product in different plants. We shall restrict the analysis to two plants for simplicity.
However, the analysis may easily be generalized to any number of plants.
Analysis of Model:
Assume that the monopolist operates two plants, A and B, each with a different cost
structure. Firm has to make two decisions:
1. How much output to produce altogether and at what price to sell it so as to
maximise profit?
2. How to allocate the production of the optimal output between the two plants?
The monopolist is assumed to know his market demand, corresponding MR curve and
the cost structure of the different plants. The total MC curve of the monopolist may be
computed from the horizontal summation of the MC curves of the individual plants
MC = MC1 + MC2
Given the MR and MC curves, the monopolist can define the total output and the price
at which it must be sold in order to maximize his profit from the intersection of these
two curves, MC and MR, as shown by point e in figure.
The allocation of production between the plants is decided by the marginalistic rule
MC1 = MC2 = MR
Explanation:
Graphically the equilibrium of the multi-plant monopolist may be defined as follows.
The total profit-maximizing output and its price is defined by the intersection of MC and
MR curves (point e in figure). From the point of inter-section we draw a line, parallel to
the X axis, until it intersects the individual MC 1 and MC2 curves of the two plants. At
these points the equilibrium condition (MC = MR = MC1 = MC2) is satisfied.
If from these points (e1 and e2) we draw perpendiculars to the X-axis, we find the level of
output that will be produced in each plant.
Clearly X1 + X2 must be equal to the profit-maximising output X. The total profit is the
sum of profits from the products of the two plants. The profit from plant A is the shaded
area abed and the profit from plant B is the shaded area gfjh.
Discuss Bilateral monopoly.
:Meaning of Bilateral Monopoly
Bilateral monopoly is a market consisting of a single seller (monopolist) and a single
buyer (monopsonist). For example, if a single firm produced all the copper in a country
and if only one firm used this metal, the copper market would be a bilateral monopoly
market.
Bilateral monopoly is rare for commodity markets, but is quite common in labour
markets, where workers are organised in a union and deal with a single employer (for
example, the miners' unions and the Coal Board) or firms organised in a trade
association.
Equilibrium Determination:
The equilibrium in such a market cannot be determined by the traditional tools of
demand and supply. Economic analysis can only define the range within which the price
will eventually be settled. The precise level of the price (and output), however, will
ultimately be defined by non-economic factors, such as the bargaining power, skill and
other strategies of the participant firms.
Under conditions of bilateral monopoly economic analysis leads to indeterminacy which
is finally resolved by exogenous factors. To illustrate a situation of bilateral monopoly
assume that all railway equipment is produced by a single firm and is bought by a single
buyer, British Rail. Both firms are assumed to aim at the maximization of their profit.
Explanation
The
equilibrium of the producer-monopolist is defined by the intersection of his
marginal revenue and marginal cost curves (point e 1 in figure). He would
maximize his profit if he were to produce X 1 quantity of equipment and sell it at
the price P1.
However, the producer cannot attain the above profit-maximising position,
because he is selling his product to a single buyer who can obviously affect the
market price by his purchasing decisions.
The buyer is aware of his power, and, being a profit maximiser, he would like to
impose his own price terms to the producer.
MC curve of the producer represents the supply curve to the buyer: the upward
slope of this curve shows that as the monopsonist increases his purchases the
price he will have to pay rises.
The MC curve is determined by conditions outside the control of the buyer, and it
shows the quantity that the monopolist-seller is willing to supply at various
prices.
The increase in the expenditure of the buyer (his marginal outlay or marginal
expenditure) due to the increases in his purchases is shown by the curve ME.
ME is also the marginal cost of equipment for the monopsonist-buyer. The
equipment is an input for the buyer. Thus in order to maximize his profit he
would like to purchase additional units of X until his marginal outlay is equal to
his price, as determined by the demand curve DD.
The equilibrium of the monopsonist is shown by point e in figure: he would like to
purchase X2 units of equipment at a price P2, determined by point a on the supply
curve MC (=S).
However, the monopsonist does not buy from a lot of small firms which would be
price-takers (that is, who would accept the price imposed by the single buyer),
but from the monopolist, who wants to charge price P 1.
Given that the buyer wants to pay P2 while the seller wants to charge P1, there is
indeterminacy in the market. The two firms will start negotiations and will
eventually reach an agreement about price, which will be settled somewhere in
the range between P1 and P2, (P2 < P* < P1), depending on the bargaining skill and
power of the firms.
Bilateral Monopoly in Commodity Market:
If a bilateral monopoly emerges in a commodity market the buyer may attempt to buy
out the seller-monopolist, thus attaining vertical integration of his production. The
consequences of such take-over are interesting. The supply curve MC (=S) becomes the
marginal-cost curve of the monopsonist, and hence his equilibrium will be denned by
point b in figure (where the 'new' marginal-cost curve intersects the price-demand curve
DD): output will increase to the level X* and the marginal cost will be P*, lower than the
price P, that the ex-monopolist would like to charge.
The result of the vertical integration in these conditions is an increase in the production
of the input, which will lead to an increase in the final product of the ex-monopsonist
and a reduction in his price, given that he is faced by a downward-sloping market-
demand curve. The examination of the welfare implications of such a situation is beyond
the scope of this elementary analysis.
