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Austrian Microeconomics, Lecture 6 with Peter Klein - Mises Academy
1. Peter G. Klein | Mises Academy 20121 | Competition and Monopoly
Peter G. Klein
University of Missouri
August 23, 2012
Austrian Microeconomics
Competition and
Monopoly
2. Peter G. Klein | Mises Academy 20122 | Competition and Monopoly
The meaning of competition
► Competition as rivalry
► Competition as freedom
(absence of legal restrictions)
Anyone can try to compete in any
particular market
Not everyone can effectively
compete!
► The common-law meaning of monopoly
► The imaginary constructions of “perfect” and “imperfect”
competition
3. Peter G. Klein | Mises Academy 20123 | Competition and Monopoly
A simple theory of “monopoly” pricing
► Menger and his followers: monopoly (and monopsony)
defined in terms of characteristics of buyers and sellers in the
market (exogenously determined)
► Theory virtually forgotten after “imperfect
competition revolution” of the 1930s
(Chamberlin, Robinson)
► Revived by Mises (1949) and Rothbard (1962),
who emphasized the role of legal restrictions
4. Peter G. Klein | Mises Academy 20124 | Competition and Monopoly
Monopoly pricing I
► Seller possesses one unit of the good
Good goes to the most capable buyer at a price between his reservation
price and the reservation price of the next most capable buyer (and
above the seller’s reservation price).
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Seller’s
reservation price
$150
Q* = 1
$275 < P* < $300
5. Peter G. Klein | Mises Academy 20125 | Competition and Monopoly
Monopoly pricing II
► Seller possesses multiple units of the good
Goods go to the most capable buyers who value the good at a price
above the seller’s reservation price, at a price between the reservation
price of the last buyer and the first non-buyer.
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Seller’s
reservation price
$150
Q* = 3
$225 < P* < $250
6. Peter G. Klein | Mises Academy 20126 | Competition and Monopoly
Monopoly pricing III
► Multiple sellers, same reservation prices
Goods go to the most capable buyers who value the good at a price
above the sellers’ reservation prices, at a price between the reservation
price of the last buyer and the first non-buyer.
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Pmin
$150
$150
$150
$150
$150
Sellers
S1
S2
S3
S4
S5
Q* = 5
$150 < P* < $200
7. Peter G. Klein | Mises Academy 20127 | Competition and Monopoly
Monopoly pricing IV
► Multiple sellers, same reservation prices
Goods go to the most capable buyers who value the good at a price
above the sellers’ reservation prices, at a price between the reservation
price of the last buyer and the first non-buyer.
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Pmin
$240
$240
$240
$240
$240
Sellers
S1
S2
S3
S4
S5
Q* = 3
$240 < P* < $250
8. Peter G. Klein | Mises Academy 20128 | Competition and Monopoly
Monopoly pricing V
► Multiple sellers, different reservation prices
Price and quantity determined by the valuations of the “marginal pairs”
(Böhm-Bawerk)
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Pmin
$150
$170
$190
$210
$230
Sellers
S1
S2
S3
S4
S5
Q* = 4
$210 < P* < $225
9. Peter G. Klein | Mises Academy 20129 | Competition and Monopoly
Monopoly pricing: implications
► Equilibrium prices and quantities depend not on the numbers
of buyers and sellers per se, but the reservation prices of the
buyers and sellers in the market.
If all sellers have the same reservation prices (below at least some
buyers’ reservation prices), then equilibrium prices are decreasing in
the number of sellers, ceteris paribus.
If all buyers have the same reservation prices (above at least some
sellers’ reservation prices), then equilibrium prices are increasing in
the number of buyers, ceteris paribus.
But no reason to believe these are the “usual” cases!
► No particular normative implications, absent legal
restrictions!
10. Peter G. Klein | Mises Academy 201210 | Competition and Monopoly
“Perfect” and “imperfect” competition
► Imaginary constructions, but not useful ones
► Markets characterized by
Type of product (homogenous, differentiated, unique)
Numbers and sizes of buyers and sellers
Entry and exit conditions (legal and non-legal)
Information conditions (perfect or imperfect)
► Examples: perfect competition,
monopolistic competition, oligopoly,
monopoly
11. Peter G. Klein | Mises Academy 201211 | Competition and Monopoly
The perfectly competitive firm
P
Q
MC
D = MRPPC
Firm maximizes
profit by producing
the quantity at
which MR = MC
Demand curve
assumed to be
perfectly elastic
QPC
12. Peter G. Klein | Mises Academy 201212 | Competition and Monopoly
Demand and marginal revenue
Example
Demand curve
P QD TR MR
10 1 10 —
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
P
Q
D
MR
6
10 elastic
unit elastic
inelastic
13. Peter G. Klein | Mises Academy 201213 | Competition and Monopoly
The firm with “market power”
P
Q
MC
D
PM
QM
MR
Firm maximizes
profit by producing
the quantity at
which MR = MC
“Market power” =
downward-sloping
demand curve
Firm “restricts”
output to increase
profit (assuming
demand curve is
inelastic above the
“competitive” price
P1
P2
Q1
14. Peter G. Klein | Mises Academy 201214 | Competition and Monopoly
Problems with the market-power approach
► No infinitesimally small units, so every firm faces a downward-
sloping demand curve.
► Requiring firms to increase output beyond the profit-
maximizing quantity violates owners’ property rights, lowering
social welfare (movie star example).
► Elasticity of demand reflects consumer preferences
Existence of close substitutes (an economic, not a technological,
concept)
► Sellers are constrained by potential competition.
“Predatory pricing” example
15. Peter G. Klein | Mises Academy 201215 | Competition and Monopoly
The role of potential competition
► Example with one-sided competition among buyers
Case I: seller faces no potential competition
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Seller’s
reservation price
S1 $290
Q* = 1
$290 < P* < $300
16. Peter G. Klein | Mises Academy 201216 | Competition and Monopoly
The role of potential competition
► Example with one-sided competition among buyers
Case I: seller faces a potential competitor.
Buyers
B1
B2
B3
B4
B5
Pmax
$300
$275
$250
$225
$200
Seller’s
reservation price
S1 $290
(S2 $280)
Q* = 1
$280 < P* < $300
17. Peter G. Klein | Mises Academy 201217 | Competition and Monopoly
Government-granted monopoly
► Obvious sources of monopoly privilege
Patents
Exclusive grants, charters, and concessions
Licenses
Tariffs and quotas
► Less obvious sources
Progressive taxation (limits capital accumulation, which favors
incumbent firms)
Labor and environmental restrictions (Clean Air Act, Americans with
Disability Act)
18. Peter G. Klein | Mises Academy 201218 | Competition and Monopoly
Antitrust policy
► Two “free-market” views
Government should refrain from granting monopoly privilege.
Monopoly arises naturally, on the market, and government should
intervene to promote competition.
► US antitrust laws to “promote competition”
Sherman Act (1890): outlaws “restraints on trade” through
monopolistic practices
Clayton Act (1914): outlaws price discrimination, “tying”
Robinson-Patman Act (1936): outlaws
“predatory pricing”
19. Peter G. Klein | Mises Academy 201219 | Competition and Monopoly
Practical problems with antitrust policy
► Large market share is the consequence, not the cause, of
superior financial performance.
► The relevant market is hard to define.
► Suits can be filed either by government agencies (FTC and
DOJ) or by rival firms, which may use the law to punish a more
efficient competitor.
The historical origins of antitrust
► Suits can last a long time, but markets change very rapidly
(IBM case).
20. Peter G. Klein | Mises Academy 201220 | Competition and Monopoly
The dilemma of antitrust
“You’re gouging on your prices if
You charge more than the rest.
But it’s unfair competition
If you think you can charge less!
A second point that we would like to make
To help avoid confusion:
Don’t try to charge the same amount!
That would be collusion!”
— R.W. Grant, Tom Smith and His Incredible
Bread Machine (1964)
21. Peter G. Klein | Mises Academy 201221 | Competition and Monopoly
Theoretical problems with antitrust policy
► No scientific means of distinguishing, in the real world,
“monopoly prices” from “competitive prices” (other than the
existence of government-created entry barriers)
► Legal problem: antitrust laws are ex post facto
22. Peter G. Klein | Mises Academy 201222 | Competition and Monopoly
Takeaways from the course
► Austrian microeconomics
Focus on “mundane” economic topics, not esoterica
Not simply a verbal representation of neoclassical economics
► Emphasis on cause and effect
► Focus on real market behavior (prices, quantities, other actions)
► Hence, “causal-realist” economics
► For further study
Rothbard’s Man, Economy, and State; Mises’s Human Action
Austrian Macroeconomics with Joseph Salerno
Applications of mundane economics to business cycles,
entrepreneurship, regulation, trade, education, . . . .
Mises.org
23. Peter G. Klein | Mises Academy 201223 | Competition and Monopoly