GARIS BESAR BAB 10

1 Monopoli
2 Monopoly Power
3 Sources of Monopoly Power
4 The Social Costs of Monopoly Power
5 Monopsoni
6 Monopsony Power
7 Limiting Market Power: The Antitrust Laws
Kekuatan Pasar: Monopoli dan Monopsoni

● Monopoli adalah pasar dengan hanya

satu penjual.

● Monopsoni adalahpasar dengan hanya

ada satu pembeli.

● Kekuatan Pasar Ability of a seller or buyer

to affect the price of a good.
 1 MONOPOLI

Penerimaan Rata-rata dan Penerimaan Marginal

● Penerimaan Marginal Change in revenue
resulting from a one-unit increase in output.

To see the relationship among total, average, and marginal revenue,

consider a firm facing the following demand curve:
P=6–Q
TR, MR, dan AR

Harga (P) Jumlah (Q) TR MR AR)

$6 0 $0 --- ---
5 1 5 $5 $5
4 2 8 3 4
3 3 9 1 3
2 4 8 -1 2
1 5 5 -3 1
 1 MONOPOLI

Penerimaan Rata-rata dan Penerimaan Marginal

Average and Marginal

Revenue
Average and marginal
revenue are shown for
the demand curve
P = 6 − Q.
 1 MONOPOLI

The Monopolist’s Output Decision

Profit Is Maximized When Marginal

Revenue Equals Marginal Cost

Q* is the output level at which

MR = MC.
If the firm produces a smaller
output—say, Q1—it sacrifices
some profit because the extra
revenue that could be earned
from producing and selling the
units between Q1 and Q*
exceeds the cost of producing
them.
Similarly, expanding output from
Q* to Q2 would reduce profit
because the additional cost
would exceed the additional
revenue.
 1 MONOPOLI

The Monopolist’s Output Decision

We can also see algebraically that Q* maximizes profit. Profit π is the

difference between revenue and cost, both of which depend on Q:

As Q is increased from zero, profit will increase until it reaches a

maximum and then begin to decrease. Thus the profit-maximizing
Q is such that the incremental profit resulting from a small increase
in Q is just zero (i.e., Δπ /ΔQ = 0). Then

But ΔR/ΔQ is marginal revenue and ΔC/ΔQ is marginal cost. Thus

the profit-maximizing condition is that

, or
 1 MONOPOLI

A Rule of Thumb for Pricing

We want to translate the condition that marginal revenue should

equal marginal cost into a rule of thumb that can be more easily
applied in practice.
To do this, we first write the expression for marginal revenue:
 1 MONOPOLI

A Rule of Thumb for Pricing

Note that the extra revenue from an incremental unit of quantity,
Δ(PQ)/ΔQ, has two components:
1. Producing one extra unit and selling it at price P brings in
revenue (1)(P) = P.
2. But because the firm faces a downward-sloping demand
curve, producing and selling this extra unit also results in
a small drop in price ΔP/ΔQ, which reduces the revenue
from all units sold (i.e., a change in revenue Q[ΔP/ΔQ]).
Thus,
 1 MONOPOLI

A Rule of Thumb for Pricing

(Q/P)(ΔP/ΔQ) is the reciprocal of the elasticity of demand,
1/Ed, measured at the profit-maximizing output, and

Now, because the firm’s objective is to maximize profit, we

can set marginal revenue equal to marginal cost:

which can be rearranged to give us

Equivalently, we can rearrange this equation to express

price directly as a markup over marginal cost:
 1 MONOPOLI

Shifts in Demand

Shifts in Demand

Shifting the demand curve shows

that a monopolistic market has no
supply curve—i.e., there is no
one-to-one relationship between
price and quantity produced.
In (a), the demand curve D1 shifts
to new demand curve D2.
But the new marginal revenue
curve MR2 intersects marginal
cost at the same point as the old
marginal revenue curve MR1.
The profit-maximizing output
therefore remains the same,
although price falls from P1 to P2.
In (b), the new marginal revenue
curve MR2 intersects marginal
cost at a higher output level Q2.
But because demand is now more
elastic, price remains the same.
 1 MONOPOLI

The Effect of a Tax

Suppose a specific tax of t dollars per unit is levied, so that the
monopolist must remit t dollars to the government for every unit it
sells. If MC was the firm’s original marginal cost, its optimal production
decision is now given by

Effect of Excise Tax on Monopolist

With a tax t per unit, the firm’s

effective marginal cost is
increased by the amount t to
MC + t.
In this example, the increase in
price ΔP is larger than the tax t.
 1 MONOPOLI

*The Multiplant Firm

Suppose a firm has two plants. What should its total output be, and
how much of that output should each plant produce? We can find the
answer intuitively in two steps.

● Step 1. Whatever the total output, it should be divided between

the two plants so that marginal cost is the same in each plant.
Otherwise, the firm could reduce its costs and increase its profit
by reallocating production.

● Step 2. We know that total output must be such that marginal

revenue equals marginal cost. Otherwise, the firm could increase
its profit by raising or lowering total output.
 1 MONOPOLI

*The Multiplant Firm

We can also derive this result algebraically. Let Q1 and C1 be the

output and cost of production for Plant 1, Q2 and C2 be the output and
cost of production for Plant 2, and QT = Q1 + Q2 be total output. Then
profit is

The firm should increase output from each plant until the incremental
profit from the last unit produced is zero. Start by setting incremental
profit from output at Plant 1 to zero:

Here Δ(PQT)/ΔQ1 is the revenue from producing and selling one more
unit—i.e., marginal revenue, MR, for all of the firm’s output.
 1 MONOPOLI

*The Multiplant Firm

The next term, ΔC1/ΔQ1, is marginal cost at Plant 1, MC1. We thus

have MR − MC1 = 0, or

Similarly, we can set incremental profit from output at Plant 2 to zero,

Putting these relations together, we see that the firm should produce so
that
 1 MONOPOLI

*The Multiplant Firm

Production with Two Plants

A firm with two plants

maximizes profits by
choosing output levels Q1
and Q2 so that marginal
revenue MR (which
depends on total output)
equals marginal costs for
each plant, MC1 and MC2.
 2 KEKUATAN MONOPOLI

Measuring Monopoly Power

Remember the important distinction between a perfectly competitive

firm and a firm with monopoly power: For the competitive firm, price
equals marginal cost; for the firm with monopoly power, price exceeds
marginal cost.
● Lerner Index of Monopoly Power
Measure of monopoly power calculated as
excess of price over marginal cost as a
fraction of price.

Mathematically:

This index of monopoly power can also be expressed in terms of the elasticity
of demand facing the firm.
 2 KEKUATAN MONOPOLI

The Rule of Thumb for Pricing

Elasticity of Demand and Price Markup

The markup (P − MC)/P is equal to minus the inverse of the elasticity of demand facing the firm.
If the firm’s demand is elastic, as in (a), the markup is small and the firm has little monopoly power.
The opposite is true if demand is relatively inelastic, as in (b).
3 SOURCES OF MONOPOLY POWER

Three factors determine a firm’s elasticity of demand.

1. The elasticity of market demand. Because the firm’s own

demand will be at least as elastic as market demand, the
elasticity of market demand limits the potential for monopoly
power.

2. The number of firms in the market. If there are many firms, it

is unlikely that any one firm will be able to affect price
significantly.

3. The interaction among firms. Even if only two or three firms

are in the market, each firm will be unable to profitably raise
price very much if the rivalry among them is aggressive, with
each firm trying to capture as much of the market as it can.
 3 SOURCES OF MONOPOLY POWER

The Elasticity of Market Demand

If there is only one firm—a pure monopolist—its demand curve is the

market demand curve.
Because the demand for oil is fairly inelastic (at least in the short run),
OPEC could raise oil prices far above marginal production cost during
the 1970s and early 1980s.
Because the demands for such commodities as coffee, cocoa, tin, and
copper are much more elastic, attempts by producers to cartelize
these markets and raise prices have largely failed.
In each case, the elasticity of market demand limits the potential
monopoly power of individual producers.
 3 SOURCES OF MONOPOLY POWER

The Number of Firms

When only a few firms account for most of the sales in a market, we
say that the market is highly concentrated.

● barrier to entry Condition that

impedes entry by new competitors.

The Interaction Among Firms

Firms might compete aggressively, undercutting one another’s prices

to capture more market share.
This could drive prices down to nearly competitive levels.
Firms might even collude (in violation of the antitrust laws), agreeing
to limit output and raise prices.
Because raising prices in concert rather than individually is more likely
to be profitable, collusion can generate substantial monopoly power.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Deadweight Loss from Monopoly Power

The shaded rectangle and triangles

show changes in consumer and
producer surplus when moving from
competitive price and quantity, Pc
and Qc,
to a monopolist’s price and quantity,
Pm and Qm.
Because of the higher price,
consumers lose A + B
and producer gains A − C. The
deadweight loss is B + C.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Rent Seeking
● rent seeking Spending money in
socially unproductive efforts to acquire,
maintain, or exercise monopoly.

In 1996, the Archer Daniels Midland Company (ADM) successfully

lobbied the Clinton administration for regulations requiring that the
ethanol (ethyl alcohol) used in motor vehicle fuel be produced from
corn.
Why? Because ADM had a near monopoly on corn-based ethanol
production, so the regulation would increase its gains from monopoly
power.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Price Regulation

Price Regulation

If left alone, a monopolist

produces Qm and charges Pm.
When the government
imposes a price ceiling of P1
the firm’s average and
marginal revenue are constant
and equal to P1 for output
levels up to Q1.
For larger output levels, the
original average and marginal
revenue curves apply.
The new marginal revenue
curve is, therefore, the dark
purple line, which intersects
the marginal cost curve at Q1.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Price Regulation

Price Regulation

When price is lowered to

Pc, at the point where
marginal cost intersects
average revenue, output
increases to its maximum
Qc. This is the output that
would be produced by a
competitive industry.
Lowering price further, to
P3 reduces output to Q3
and causes a shortage,
Q’3 − Q3.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Natural Monopoly
● natural monopoly Firm that can produce the
entire output of the market at a cost lower than
what it would be if there were several firms.

Regulating the Price of a Natural

Monopoly
A firm is a natural monopoly
because it has economies of
scale (declining average and
marginal costs) over its entire
output range.
If price were regulated to be Pc
the firm would lose money and
go out of business.
Setting the price at Pr yields the
largest possible output consistent
with the firm’s remaining in
business; excess profit is zero.
 4 THE SOCIAL COSTS OF MONOPOLY POWER

Regulation in Practice

● rate-of-return regulation Maximum price

allowed by a regulatory agency is based on the
(expected) rate of return that a firm will earn.

The difficulty of agreeing on a set of numbers to be used in rate-of-

return calculations often leads to delays in the regulatory response to
changes in cost and other market conditions.
The net result is regulatory lag—the delays of a year or more usually
entailed in changing regulated prices.
5 MONOPSONI

● Oligopsoni Market with only a few buyers.

● monopsony power Buyer’s ability to affect the

price of a good.

● marginal value Additional benefit derived from

purchasing one more unit of a good.

● marginal expenditure Additional cost of buying

one more unit of a good.

● average expenditure Price paid per unit of a

good.
5 MONOPSONY

Competitive Buyer Compared to Competitive Seller

In (a), the competitive buyer takes market price P* as given. Therefore, marginal expenditure and
average expenditure are constant and equal;
quantity purchased is found by equating price to marginal value (demand).
In (b), the competitive seller also takes price as given. Marginal revenue and average revenue are
constant and equal;
quantity sold is found by equating price to marginal cost.
5 MONOPSONY

Monopsonist Buyer

The market supply curve is

monopsonist’s average expenditure
curve AE.
Because average expenditure is
rising, marginal expenditure lies
above it.
The monopsonist purchases quantity
Q*m, where marginal expenditure and
marginal value (demand) intersect.
The price paid per unit P*m is then
found from the average expenditure
(supply) curve.
In a competitive market, price and
quantity, Pc and Qc, are both higher.
They are found at the point where
average expenditure (supply) and
marginal value (demand) intersect.
 5 MONOPSONY
Monopsony and Monopoly Compared

Monopoly and Monopsony

These diagrams show the close analogy between monopoly and monopsony.
(a) The monopolist produces where marginal revenue intersects marginal cost.
Average revenue exceeds marginal revenue, so that price exceeds marginal cost.
(b) The monopsonist purchases up to the point where marginal expenditure intersects marginal value.
Marginal expenditure exceeds average expenditure, so that marginal value exceeds price.
6 MONOPSONY POWER

Monopsony Power: Elastic versus Inelastic Supply

Monopsony power depends on the elasticity of supply.

When supply is elastic, as in (a), marginal expenditure and average expenditure do not differ by
much, so price is close to what it would be in a competitive market.
The opposite is true when supply is inelastic, as in (b).
 6 MONOPSONY POWER

Sources of Monopsony Power

Elasticity of Market Supply
If only one buyer is in the market—a pure monopsonist—its
monopsony power is completely determined by the elasticity of market
supply. If supply is highly elastic, monopsony power is small and there
is little gain in being the only buyer.

Number of Buyers
When the number of buyers is very large, no single buyer can have
much influence over price. Thus each buyer faces an extremely elastic
supply curve, so that the market is almost completely competitive.

Interaction Among Buyers

If four buyers in a market compete aggressively, they will bid up the
price close to their marginal value of the product, and will thus have
little monopsony power. On the other hand, if those buyers compete
less aggressively, or even collude, prices will not be bid up very much,
and the buyers’ degree of monopsony power might be nearly as high
as if there were only one buyer.
 6 MONOPSONY POWER

The Social Costs of Monopsony Power

Deadweight Loss from

Monopsony Power

The shaded rectangle and

triangles show changes in
buyer and seller surplus
when moving from
competitive price and
quantity, Pc and Qc,
to the monopsonist’s price
and quantity, Pm and Qm.
Because both price and
quantity are lower, there is
an increase in buyer
(consumer) surplus given
by A − B.
Producer surplus falls by
A + C, so there is a
deadweight loss given by
triangles B and C.
 6 MONOPSONY POWER

Bilateral Monopoly

● bilateral monopoly Market with only

one seller and one buyer.

Monopsony power and monopoly power will tend to counteract each

other.
7 LIMITING MARKET POWER: THE ANTITRUST LAWS

● antitrust laws Rules and regulations

prohibiting actions that restrain, or are
likely to restrain, competition.

There have been numerous instances of illegal combinations. For example:

● In 1996, Archer Daniels Midland Company (ADM) and two other major
producers of lysine (an animal feed additive) pleaded guilty to criminal
charges of price fixing.
● In 1999, four of the world’s largest drug and chemical companies—
Roche A.G. of Switzerland, BASF A.G. of Germany, Rhone-Poulenc of
France, and Takeda Chemical Industries of Japan—were charged by the
U.S. Department of Justice with taking part in a global conspiracy to fix
the prices of vitamins sold in the United States.
● In 2002, the U.S. Department of Justice began an investigation of price
fixing by DRAM (dynamic access random memory) producers. By 2006,
five manufacturers—Hynix, Infineon, Micron Technology, Samsung, and
Elpida—had pled guilty for participating in an international price-fixing
scheme.
7 LIMITING MARKET POWER: THE ANTITRUST LAWS

● parallel conduct Form of implicit

collusion in which one firm consistently
follows actions of another.

● predatory pricing Practice of

pricing to drive current competitors out
of business and to discourage new
entrants in a market so that a firm can
enjoy higher future profits.
 7 LIMITING MARKET POWER: THE ANTITRUST LAWS

Enforcement of the Antitrust Laws

The antitrust laws are enforced in three ways:

1. Through the Antitrust Division of the Department of
Justice.
2. Through the administrative procedures of the Federal
Trade Commission.
3. Through private proceedings.