VIII. Resource markets

    C. Market power and resource markets

    Key concepts:
    VMPL = P^.MPL
    TR = P(Q)^.Q(L)
    MRPL = DTR/DL (= DTR/DQ^.DQ/DL = MR^.MPL)
    TFCL = PL^.L
    MFCL = DTFCL/DL

    1. Product market monopoly

    PC markets: MR=P => MRPL = VMPL
    Output monopoly: MR<P => MRPL < VMPL

Example: patented bicycle tire (wind-resistant) PL = $20 QL  Q   P   TR  MRPL 3   8  60  480 4  10  50  500   20 VMPL4 = $50x2=$100

    Main conclusion: monopoly equilibrium:
    MRPL = PL < VMPL =>
    A monopolist pays a resource less than the value of its MP =>
    A form of economic exploitation -- PL < VMPL
    Paying PL = VMPL => workers could buy back everything they contributed to total output.
    In restricting Q, monopolist stops hiring inputs at a point at which vmp ($100) exceeds wage ($20)--workers can't buy back all they contributed.
    Monopolist restricts output by underhiring inputs.

2. Buyer power: resource market monopsony

    ? Are college athletes exploited?
    To economists, workers are exploited if they are paid less than the value of their contribution to society. College athletes fall into this group

    (Doug Flutie, FB: $3M MRP for Boston College / Wayman Tisdale, BKB: $550K to U of OK)
    These numbers reflect their value.
    ? What were they paid?
   Few of them ever get the bigger payoff from becoming professionals (MIT yell)

    ?Why does this happen?
    NCAA recruiting rules make Div 1A schools act like a monopsony

    Monopsony = single buyer

    Monopolist restricts sales to charge more
    Monopsonist restricts purchases to pay less

    Other possible examples where firm is the only employer of a particular input:
    Mining town / university town
    Intern policy of AMA: get law on their side. Hospitals lose "class a" certification if they bid on intern wages. Restricts nursing market as well.
    Reserve clause in baseball--ties player to one team

    Monopsony => buyer faces an upward-sloping supply curve

Ex: nursing

Draw upward-sloping SL   QL PL TFCL MFCL 3 8   ______ 4 9   ? Why is MFCL4 > PL4? A=PL4 A+B = MFCL4

    General result: upward-sloping SL => MFCL > PL

    TFCL = PL^.L
    MFCL = DTFCL/DL = D(PL^.L)/DL = PL + L^.DPL/DL

    DPL/DL = 0 for a PC buyer => MFCL = PL
        > 0 for a monoposony => MFCL > PL

    Monopsony's profit-maximizing process:
    Step 1: Calculate MRPL:
        1a: Calculate TR = P(Q)^.Q(L)
        1b: Calculate MRPL = DTR/DL
    Step 2: Calculate MFCL:
        2a: Calculate TFCL = PL(L)^.L
        2b: Calculate MFCL = DTFCL/DL
    Step 3: Hire more L as long as MRPL >= MFCL --> Lm
    Step 4: Pay Lm as little as possible

3. Labor unions

    An attempt to organize the supply side of the market.
    Tries to be a monopolist: the only seller of a resource to an industry
    The difference: Not one firm, but a collection of separate agents.
    Each would like max wage possible, but must act collectively.
    So, we don't know what their objective function is and so we aren't sure exactly where they will want to set PL.

    Result in competitive markets: technical inefficiency--PL's not equal in all industries

    Application here: a union can raise wages and efficiency when there is a monopsony employer.
    Usually a price floor reduces Q bought and causes inefficiency
    With a monoposony, a price floor can raise Q bought and reduce inefficiency.

Suppose the result of collective bargaining is a wage floor. Draw the MFCL curve and note the new optimum.

    Summary: lack of PC on either side of a market, selling or buying side, results in inefficiency

Application: Tommy in Indonesia

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