# Tag Info

29

This is known as dividing markets or market allocation, and it is against the law in the US, the EU, and I imagine in most countries with antitrust laws.

22

This is more of an elaboration of The Almighty Bob's answer: It is true that if we start from a competitive market (i.e. large numbers of buyers and sellers), then granting market power to sellers (e.g. workers) by allowing the formation of a monopolistic cartel is bad for efficiency. Those sellers will use their market power to increase the price (and ...

18

$PQ(P)=TR$, Total Revenue. $\frac{∂Q}{∂P}P+Q$ is the derivative of $PQ(P)$ with respect to $P$. $MR$, Marginal Revenue, is the derivative of $TR$ with respect to $Q$. So in general $\frac{∂Q}{∂P}P+Q \neq MR$

13

I think your question has two parts: Is a labor union a cartel? Is a labor union therefore illegal? Let me give you the quick answer to both: 1) yes, 2) no. The longer version is the following: You are right, there is, from an economical point of view not that much of a difference between selling a good and labor, so a union could (and most times is) ...

11

Varian has a paper on Price Discrimination and Social Welfare in which he gives some necessary and sufficient conditions for (third degree) price discrimination to increase welfare. A necessary condition is that the total level of output (i.e. the total number of consumers served) increases as a result of the discrimination. A sufficient condition is that ...

9

Price discrimination is generally welfare ambiguous. Basic example: A monopoly can price discriminate between two market segments. In segment A, there is one consumer with a willingness to pay of $\$1$million and there are one million consumers with a willingness to pay of$\$1$. In segment B, there is one consumer willing to pay $\$1$million and 400,000 ... 8 It can be profitable for the monopolist to do so. For the conventional producer who is a price taker the profit objective function looks like this: $$\max_{q} \Pi^c$$ where$\Pi^c = P \cdot q - C(q)$. That is, they seek to maximize profits, facing an exogenous price to sell goods and where costs are a function of amount produced. If everything is nice and ... 6 Cannibalization Assuming that the [near] expired goods cannot be sold at full cost anymore, offering them for sale at a significant discount (instead of destroying them) will compete with your own offer of full-priced goods that presumably have much higher margins. This is pretty much the definition of https://en.wikipedia.org/wiki/Cannibalization_(... 6 It is perfectly consistent for the marginal revenue to increase in$q$, even if the demand curve decreases. Marginal revenue is $$p(q)+ q p'(q).$$ The first term says "if I sell one extra unit then I will receive an extra$p$in revenue". The larger is this effect, the higher is the MR. The second term says "in order to sell one extra unit, I will have to ... 5 Suppose the marginal cost is constant and equal to$c$, that fixed costs are$K>0$, and that revenue is$R(q)$. You seem to understand that MR=MC must be true for profits to be maximized:$R'(q)=c$. We also know that average costs are given by$AC=(K+qc)/q$. But note that$AC=(K+qc)/q>c=MC$. Thus, when profits are maximized we have$AC>MC=R'(q)$. So ... 5 We have that $$D(p^*,\mathbf{a}) = -\frac {d}{dp^*}\int_{p^*}^\infty\!D(p;\mathbf{a})\,dp,$$ $$\Rightarrow \text{PS}(p^*) = -\text{CS}'(p^*)p^* \tag{1}$$ So $$\text{PS}(p^*)= \text{CS}(p^*) \Rightarrow -\text{CS}'(p^*)p^* = \text{CS}(p^*)$$ or $$\text{CS}'(p^*) + \frac 1{p^*}\text{CS}(p^*)=0 \tag{2}$$ which is a first-order linear homogeneous ... 5 As you pointed out, the problem of inefficient supply by a profit maximizing monopolist can be solved via subsidizing the monopolist to increase his marginal revenue. The subsidy can be paid by the consumers or by a central government. Consumers unfortunately perceive the problem as a collective action problem: The marginal utility gain from subsidizing the ... 5 First, let's be clear what we mean by abuse of dominance: this is when a firm is a monopoly or near-monopoly, and attempts to use that position in order to perpetuate or enhance its dominance of the market at the expense of competition. So we need to know: why would a market with a monopoly perform worse than one with competition. Here are the main typical ... 5 First let's look at the specific tax. The profit is $$\pi_s=[P(q)-\tau_s]q-C(q).$$ Differentiating to establish the first-order condition: $$P'(q)q+P(q)-\tau_s-C'(q)=0.$$ If we write$A=\tau_s q$for the tax revenue then we can rewrite the FOC thus: $$P'(q)q+P(q)-C'(q)=\frac{A}{q}.$$ Now for ad valorem: $$\pi_a=(1-\tau_a)P(q)q-C(q)$$ First-order condition:$...

5

To complement @AdamBailey to-the-point answer, the purpose of this post was to alert interested readers to the consequences of changing decision-variables in our thinking. We are accustomed to think of Demand as either "price depending on quantity" or "quantity depending on price". But on the production-cost side, we automatically tend to ...

5

Prices are high because drug firms have monopoly power, granted to them by the patent system. In addition the demand for the drugs is fairly inelastic because once you fall seriously ill you're often willing to pay a high price for the cure. If your insurance covers it, you won't even directly notice the price. So the companies can charge almost any price. ...

4

An arbitrarily large ratio should occur with demand curve $P=\begin{cases} \frac{1}{Q} & \text{if } Q>1 \\ 2-Q & \text{if } Q\leq 1 \\ \end{cases}$. The monopolist prices at $P=1$, but the consumers' surplus if $P=0$ is infinite, because the area under the demand curve contains $\int_1^\infty \frac{1}{Q}dQ=\infty$.

4

Consider the following two examples: There is a consumer who is willing to pay 50 dollars for a good. (Reservation price is 50.) There is a seller who is willing to sell for 30 dollars. (Marginal cost is constant 30.) If they make a deal at any price $p$ the total surplus they enjoy will be $(50 - p) + (p - 30) = 20.$ The individual surpluses need only be ...

4

Your question is quite broad in the sense that various forms of market failure cover a significant portion of all of microeconomics. I presume you have already looked in a general undergraduate micro book such as Varian's Intermediate Microeconmics, which provide coverage of many of these topics. More detailed coverage of market power and monopoly can be ...

4

Demand for existing firms' product shifts in because the entering firms attract some of the users.

4

That is basically an assumption here. Often in monopoly problems we assume constant marginal costs (i.e. a linear cost function) to keep things simple. In that case the Marginal Cost Curve is horizontal in the graph.

4

While principles level textbooks do usually assume that MC is constant for the monopolist for simplicity, by no means does it have to be constant. It may indeed be upward-sloping. Also, both the long-run and short-run marginal cost curves may be horizontal and/or curved, depending on the technology in use. An upward-sloping MC curve will affect the ...

4

Perfectly inelastic demand means quantity demanded is $q$ irrespective of the price. If producing quantity $q$ costs $c$ then the monopolist's problem is $$\max_p \{pq-c\}.$$ This problem is not well-defined because the function $pq-c$ is increasing in $p$ and has no maximum. So there is no solution to the monopolist's problem. Intuitively, since the ...

4

Monopoly and competition are one of the central topics in microeconomics, so there many theories on the source of monopoly, and they are not universally applicable. Government intervention is certainly one possible source of monopoly, but there are many others. I don't think I could give a general answer that does the question justice, so I will just give ...

4

The quote in the question isn't really rigorous about what a free market is, but it talks about monopolies and artificial scarcities, so I am interpreting the efficient outcome with price equal to marginal cost as being one necessary feature of what they understand as a free market. Let's look at the cournot model of competition. There are $n$ firms, each ...

3

The Bertrand case you mention is a little special because it induces a discontinuity in the demand function. Suppose that market demand is $D(P)=1-P$, zero marginal cost, and that all consumers buy from the low priced firm (and split equally in the event of a tie). If the two firms try to collude around a price $p=0.5$ (with quantity $0.25$ each) then each ...

3

Simple answer: It cost companies money to do any, even doing nothing. The immediate issues with selling out of date food in most jurisdictions would be: Do nothing (stockpile non-perishable.) Goods are assets of the company and affect internal and external accounting, especially accounting of value of publicly traded companies. Goods as assets are likely ...

3

This market is an oligopoly that is subject to government regulation. It cannot be a monopoly because there is more than one firm. The presence of the regulating government body is a "red herring", it distracts from the main point- there are multiple firms. It does not appear to be competitive because: Four is subjectively few firms Implicitly, ...

3

In addition to BKay's answer, selling expired food opens a firm to suit. This occurs either via breach of an implied warranty (that the food is fit for consumption) or, in many jurisdictions, strict tort. While grocers do carry products liability insurance, the policies require that stores adopt certain standards of practice. It should make sense that ...

3

This definitely is not a complete answer. But I can imagine the case of increasing returns to scale. Or natural entry barrier. Increasing returns to scale is often discussed in international trade theory, but it can be also relevant here. Example: think about commercial aircraft industry, dominated by Boeing and Airbus. Aircraft industry is seen as ...

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