Daniel l. Rubinfeld
Daniel l. Rubinfeld
Daniel l. Rubinfeld
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354 Part 3 Market Structure and Competitive Strategy<br />
o Market Power Monopoly and Monopsony 355<br />
S/Q<br />
s/Q<br />
S/Q<br />
:VIE<br />
5 :\E<br />
P' I<br />
Pc l __________ _<br />
lviC<br />
Pc<br />
MV<br />
P'<br />
AR<br />
Q c Quantity Quantity<br />
The market supply curve is the monopsonist's aver~ge expe~diture curve<br />
Average expenditure is rising, so marginal expenditure li~s above It. TIle .<br />
ist purchases quantity Q~" where marginal expendIture and margmal<br />
(demand) intersect. The price paid per unit P;" is then found from the<br />
expendihue (supply) curve. In a competitive market, price and q~antity; Pc and<br />
are both They are fOlmd at the point where average expendIhlre (supply)<br />
diagrams show the close analogy between monopoly and monopsony. (a) 111e monopolist produces where<br />
i.'U"~I'l"""Vrevenue intersects marginal cost. Average revenue exceeds marginal revenue, so that price exceeds marginal<br />
cost. (b) The monopsonist purchases up to the point where marginal expenditure intersects marginal value. Marginal<br />
exceeds average expenditure, so that marginal value exceeds price.<br />
Figure 10.14 illustrates this principle. The optimal quantity for th~ monopso~·<br />
ist to buy, Q~/f is found at the intersection of the demand and Ir:argmal expenditure<br />
curves. The price that the monopsonist pays is fou~d trom the supply<br />
curve: It is the price P~, that brings forth the supply Q~,. Fm~lly, note t~at this<br />
quantity Q~, is less, and the price P;" is lower, than the quantIty and pnce that<br />
would prevail in a competitive market, Qc and PC'<br />
Monopsony and Monopoly Compared<br />
Monopsony is easier to understand if you compare it with monopoly. ~igures<br />
10.15(a) and 10.15(b) illustrate this comparison. Recall that a monopolIst ~an<br />
charae a price above marainal cost because it faces a downward-slopmg<br />
dem~nd, or average revenueocurve, so that marginal revenue is less than a~erag:<br />
revenue. Equating marainal cost with marginal revenue leads to a quantIty ~<br />
that is less than 'what w~uld be produced in a competitive market, and to a pnee<br />
P* that is higher than the competitive price Pc _ .<br />
The monopsony situation is exactly analogous. As Figure 10.1::l(b) Illustrate~f<br />
the monopsonist can purchase a good at a price below its margillal'l'nille beca~elt<br />
faces an upward-slopmg<br />
.<br />
supply, or average expen<br />
d't "e Thus tor a<br />
1 ure, CUI\. .<br />
monopsonist, marginal expenditure is greater than average ex~end:ture.<br />
Equatina marainal value with marainal expendihue leads to a quantIty Q tha'<br />
° ° .0.. k d t ice P* t<br />
is less than what would be bought m a competltive mar et, an 0 a pr<br />
is Im'\'er than the competitive price PC'<br />
Much more common than pure monopsony are markets with only a few firms<br />
competing among themselves as buyers, so that each finn has some monopsony<br />
power. For example, the major US automobile manufacturers compete 'with one<br />
another as buyers of tires. Because each of them accounts for a large share of the<br />
tire market, each has some monopsony power in that market. General Motors,<br />
the largest, might be able to exert considerable monopsony power \,\'hen contracting<br />
for supplies of tires (and other automotive parts).<br />
In a competitive market, price and marginal value are equaL A buyer with<br />
monopsony power, hm,\,ever, can purchase a good at a price belo'w marginal<br />
value. The extent to which price is marked down below marginal value depends<br />
on the elasticity of supply faCing the buyer.16 If supply is \'ery elastic (E5 is large),<br />
markdown will be small and the buyer 'will have little monopsony power.<br />
C~nversely, if supply is very inelastic, the markdown will be large and the buyer<br />
will have considerable monopsony power. Figures 10.16(a) and 10.16(b) illustrate<br />
these two cases.<br />
exact relationship (analogous to equation (10.1)) is gi\"en by (MV - P)IP = liEs This equafollows<br />
because MV ME and :VIE = ':"(PQ)/':"Q = P + Q(':"P!':"Q)