国际贸易经济管理学与财务知识分析 课件

Chapter8FirmsintheGlobalEconomy:ExportDecisions,Outsourcing,andMultinationalEnterprisesChapter8FirmsintheGlobalEPreviewMonopolisticcompetitionandtradeThesignificanceofintra-industrytradeFirmresponsestotrade:winners,losers,andindustryperformanceDumpingMultinationalsandoutsourcing2PreviewMonopolisticcompetitioIntroductionWheneconomiesofscaleexist,largefirmsmaybemoreefficientthansmallfirms,andtheindustrymayconsistofamonopolyorafewlargefirms.Productionmaybeimperfectlycompetitiveinthesensethatexcessormonopolyprofitsarecapturedbylargefirms.Internaleconomiesofscaleresultwhenlargefirmshaveacostadvantageoversmallfirms,causingtheindustryto

become

uncompetitive.3IntroductionWheneconomiesofIntroduction(cont.)Internaleconomiesofscaleimplythatafirm’saveragecostofproductiondecreasesthemoreoutputitproduces.Perfectcompetitionthatdrivesthepriceofagooddowntomarginalcostwouldimplylossesforthosefirmsbecausetheywouldnotbeabletorecoverthehighercostsincurredfromproducingtheinitialunitsofoutput.Asaresult,perfectcompetitionwouldforcethosefirmsoutofthemarket.4Introduction(cont.)InternaleIntroduction(cont.)Inmostsectors,goodsaredifferentiatedfromeachotherandthereareotherdifferencesacrossfirms.Integrationcausesthebetter-performingfirmstothriveandexpand,whiletheworse-performingfirmscontract.Additionalsourceofgainfromtrade:Asproductionisconcentratedtowardbetter-performingfirms,theoverallefficiencyoftheindustryimproves.Studywhythosebetter-performingfirmshaveagreaterincentivetoengageintheglobaleconomy.5Introduction(cont.)InmostseTheTheoryofImperfectCompetitionInimperfectcompetition,firmsareawarethattheycaninfluencethepricesoftheirproductsandthattheycansellmoreonlybyreducingtheirprice.Thissituationoccurswhenthereareonlyafewmajorproducersofaparticulargoodorwheneachfirmproducesagoodthatisdifferentiatedfromthatofrivalfirms.Eachfirmviewsitselfasapricesetter,choosingthepriceofitsproduct.6TheTheoryofImperfectCompetMonopoly:ABriefReviewAmonopolyisanindustrywithonlyonefirm.Anoligopolyisanindustrywithonlyafewfirms.Intheseindustries,themarginalrevenuegeneratedfromsellingmoreproductsislessthantheuniformpricechargedforeachproduct.Tosellmore,afirmmustlowerthepriceofallunits,notjusttheadditionalones.Themarginalrevenuefunctionthereforeliesbelowthedemandfunction(whichdeterminesthepricethatcustomersarewillingtopay).7Monopoly:ABriefReviewAmonoMonopoly:ABriefReviewAssumethatthedemandcurvethefirmfacesisastraightlineQ=A–B(P),whereQisthenumberofunitsthefirmsells,Pthepriceperunit,andAandBareconstants.MarginalrevenueequalsMR=P–Q/B.SupposethattotalcostsareC=F+c(Q),whereFisfixedcosts,thoseindependentofthelevelofoutput,andcistheconstantmarginalcost.8Monopoly:ABriefReviewAssumeFig.8-1:MonopolisticPricingandProductionDecisions9Fig.8-1:MonopolisticPricingMonopoly:ABriefReview(cont.)Averagecostisthecostofproduction(C)dividedbythetotalquantityofproduction(Q).AC=C/Q=F/Q+cMarginalcostisthecostofproducinganadditionalunitofoutput.AlargerfirmismoreefficientbecauseaveragecostdecreasesasoutputQincreases:internaleconomiesofscale.10Monopoly:ABriefReview(contFig.8-2:AverageVersusMarginalCost11Fig.8-2:AverageVersusMargiMonopoly:ABriefReview(cont.)Theprofit-maximizingoutputoccurswheremarginalrevenueequalsmarginalcost.AttheintersectionoftheMCandMRcurves,therevenuegainedfromsellinganextraunitequalsthecostofproducingthatunit.

Themonopolistearnssomemonopolyprofits,asindicatedbytheshadedbox,whenP>AC.12Monopoly:ABriefReview(contMonopolisticCompetitionMonopolisticcompetitionisasimplemodelofanimperfectlycompetitiveindustrythatassumesthateachfirmcandifferentiateitsproductfromtheproductofcompetitors,andtakesthepriceschargedbyitsrivalsasgiven.13MonopolisticCompetitionMonopoMonopolisticCompetition(cont.)Afirminamonopolisticallycompetitiveindustryisexpectedtosellmoreastotalsalesintheindustryincreaseandaspriceschargedbyrivalsincrease.lessasthenumberoffirmsintheindustrydecreasesandasthefirm’spriceincreases.Theseconceptsarerepresentedbythefunction:14MonopolisticCompetition(contMonopolisticCompetition(cont.)Q=S[1/n–b(P–P)]Qisanindividualfirm’ssalesSisthetotalsalesoftheindustrynisthenumberoffirmsintheindustrybisaconstanttermrepresentingtheresponsivenessofafirm’ssalestoitspricePisthepricechargedbythefirmitselfPistheaveragepricechargedbyitscompetitors15MonopolisticCompetition(contMonopolisticCompetition(cont.)Assumethatfirmsaresymmetric:allfirmsfacethesamedemandfunctionandhavethesamecostfunction.ThusallfirmsshouldchargethesamepriceandhaveequalshareofthemarketQ=S/nAveragecostsshoulddependonthesizeofthemarketandthenumberoffirms:AC=C/Q=F/Q+c=nF/S+c16MonopolisticCompetition(contMonopolisticCompetition(cont.)AC=n(F/S)+cAsthenumberoffirmsnintheindustryincreases,theaveragecostincreasesforeachfirmbecauseeachproducesless.AstotalsalesSoftheindustryincrease,theaveragecostdecreasesforeachfirmbecauseeachproducesmore.17MonopolisticCompetition(contFig.8-3:EquilibriuminaMonopolisticallyCompetitiveMarket18Fig.8-3:EquilibriuminaMonMonopolisticCompetition(cont.)Ifmonopolisticfirmsfacelineardemandfunctions,Q=A–B(P),whereAandBareconstants.Whenfirmsmaximizeprofits,theyshouldproduceuntilmarginalrevenueequalsmarginalcost:MR=P–Q/B=cAsthenumberoffirmsnintheindustryincreases,thepricethateachfirmchargesdecreasesbecauseofincreasedcompetition.19MonopolisticCompetition(contMonopolisticCompetition(cont.)Atsomenumberoffirms,thepricethatfirmscharge(whichdecreasesinn)matchestheaveragecostthatfirmspay(whichincreasesinn).Atthislong-runequilibriumnumberoffirmsintheindustry,firmshavenoincentivetoenterorexittheindustry.20MonopolisticCompetition(contMonopolisticCompetition(cont.)Ifthenumberoffirmsisgreaterthanorlessthantheequilibriumnumber,thenfirmshaveanincentivetoexitorentertheindustry.Firmshaveanincentivetoexittheindustrywhenprice<averagecost.Firmshaveanincentivetoentertheindustrywhenprice>averagecost.21MonopolisticCompetition(contMonopolisticCompetitionandTradeBecausetradeincreasesmarketsize,tradeispredictedtodecreaseaveragecostinanindustrydescribedbymonopolisticcompetition.Industrysalesincreasewithtradeleadingtodecreasedaveragecosts:AC=n(F/S)+cBecausetradeincreasesthevarietyofgoodsthatconsumerscanbuyundermonopolisticcompetition,itincreasesthewelfareofconsumers.Andbecauseaveragecostsdecrease,consumerscanalsobenefitfromadecreasedprice.22MonopolisticCompetitionandTFig.8-4:EffectsofaLargerMarket23Fig.8-4:EffectsofaLargerMonopolisticCompetitionandTrade(cont.)Asaresultoftrade,thenumberoffirmsinanewinternationalindustryispredictedtoincreaserelativetoeachnationalmarket.Butitisuncleariffirmswilllocateinthedomesticcountryorforeigncountries.Integratingmarketsthroughinternationaltradethereforehasthesameeffectsasgrowthofamarketwithinasinglecountry.24MonopolisticCompetitionandTFig.8-5:EquilibriumintheAutomobileMarket25Fig.8-5:EquilibriumintheAFig.8-5:EquilibriumintheAutomobileMarket(cont.)26Fig.8-5:EquilibriumintheATable8-1:HypotheticalExampleofGainsfromMarketIntegration27Table8-1:HypotheticalExamplMonopolisticCompetitionandTrade(cont.)Productdifferentiationandinternaleconomiesofscaleleadtotradebetweensimilarcountrieswithnocomparativeadvantagedifferencesbetweenthem.Thisisaverydifferentkindoftradethantheonebasedoncomparativeadvantage,whereeachcountryexportsitscomparativeadvantagegood.28MonopolisticCompetitionandTTheSignificanceofIntra-industryTradeIntra-industrytradereferstotwo-wayexchangesofsimilargoods.Twonewchannelsforwelfarebenefitsfromtrade:Benefitfromagreatervarietyatalowerprice.Firmsconsolidatetheirproductionandtakeadvantageofeconomiesofscale.Asmallercountrystandstogainmorefromintegrationthanalargercountry.29TheSignificanceofIntra-induTheSignificanceofIntra-industryTrade(cont.)About25–50%ofworldtradeisintra-industry.Mostprominentisthetradeofmanufacturedgoodsamongadvancedindustrialnations,whichaccountsforthemajorityofworldtrade.FortheUnitedStates,industriesthathavethemostintra-industrytrade—suchaspharmaceuticals,chemicals,andspecializedmachinery—requirerelativelylargeramountsofskilledlabor,technology,andphysicalcapital.30TheSignificanceofIntra-induTable8-2:IndexesofIntra-IndustryTradeforU.S.Industries,200931Table8-2:IndexesofIntra-InFirmResponsestoTradeIncreasedcompetitiontendstohurttheworst-performingfirms—theyareforcedtoexit.Thebest-performingfirmstakethegreatestadvantageofnewsalesopportunitiesandexpandthemost.Whenthebetter-performingfirmsexpandandtheworse-performingonescontractorexit,overallindustryperformanceimproves.Tradeandeconomicintegrationimproveindustryperformanceasmuchasthediscoveryofabettertechnologydoes.32FirmResponsestoTradeIncreasFig.8-6:PerformanceDifferencesAcrossFirms33Fig.8-6:PerformanceDifferenTradeCostsandExportDecisionsMostU.S.firmsdonotreportanyexportingactivityatall—sellonlytoU.S.customers.In2002,only18%ofU.S.manufacturingfirmsreportedanysalesabroad.Eveninindustriesthatexportmuchofwhattheyproduce,suchaschemicals,machinery,electronics,andtransportation,fewerthan40percentoffirmsexport.Amajorreasonwhytradecostsreducetradesomuchisthattheydrasticallyreducethenumberoffirmssellingtocustomersacrosstheborder.Tradecostsalsoreducethevolumeofexportsalesoffirmssellingabroad.34TradeCostsandExportDecisioFig.8-7:WinnersandLosersfromEconomicIntegration35Fig.8-7:WinnersandLosersfTradeCostsandExportDecisions(cont.)Tradecostsaddedtwoimportantpredictionstoourmodelofmonopolisticcompetitionandtrade:Whyonlyasubsetoffirmsexport,andwhyexportersarerelativelylargerandmoreproductive(lowermarginalcosts).Overwhelmingempiricalsupportforthispredictionthatexportingfirmsarebiggerandmoreproductivethanfirmsinthesameindustrythatdonotexport.IntheUnitedStates,inatypicalmanufacturingindustry,anexportingfirmisonaveragemorethantwiceaslargeasafirmthatdoesnotexport.DifferencesbetweenexportersandnonexportersareevenlargerinmanyEuropeancountries.36TradeCostsandExportDecisioTable8-3:ProportionofU.S.FirmsReportingExportSalesbyIndustry,200237Table8-3:ProportionofU.S.Fig:8-8:ExportDecisionswithTradeCosts38Fig:8-8:ExportDecisionswitDumpingDumpingisthepracticeofchargingalowerpriceforexportedgoodsthanforgoodssolddomestically.Dumpingisanexampleofpricediscrimination:

thepracticeofchargingdifferentcustomersdifferentprices.Pricediscriminationanddumpingmayoccuronlyifimperfectcompetitionexists:firmsareabletoinfluencemarketprices.marketsaresegmentedsothatgoodsarenoteasilyboughtinonemarketandresoldinanother.39DumpingDumpingisthepracticeDumping(cont.)Dumpingcanbeaprofit-maximizingstrategy:Afirmwithahighermarginalcostchoosestosetalowermarkupovermarginalcost.Therefore,anexportingfirmwillrespondtothetradecostbyloweringitsmarkupfortheexportmarket.Thisstrategyisconsideredtobedumping,regardedbymostcountriesasan“unfair”tradepractice.40Dumping(cont.)DumpingcanbeProtectionismandDumpingAU.S.firmmayappealtotheCommerceDepartmenttoinvestigateifdumpingbyforeignfirmshasinjuredtheU.S.firm.TheCommerceDepartmentmayimposean“anti-dumpingduty”(tax)toprotecttheU.S.firm.Taxequalsthedifferencebetweentheactualand“fair”priceofimports,where“fair”means“pricetheproductisnormallysoldatinthemanufacturer'sdomesticmarket.”41ProtectionismandDumpingAU.SProtectionismandDumping(cont.)42ProtectionismandDumping(conProtectionismandDumping(cont.)Mosteconomistsbelievethattheenforcementofdumpingclaimsismisguided.Tradecostshaveanaturaltendencytoinducefirmstolowertheirmarkupsinexportmarkets.Suchenforcementmaybeusedexcessivelyasanexcuseforprotectionism.43ProtectionismandDumping(conMultinationalsandOutsourcingForeigndirectinvestmentreferstoinvestmentinwhichafirminonecountrydirectlycontrolsorownsasubsidiaryinanothercountry.Ifaforeigncompanyinvestsinatleast10%ofthestockinasubsidiary,thetwofirmsaretypicallyclassifiedasamultinationalcorporation.10%ormoreofownershipinstockisdeemedtobesufficientfordirectcontrolofbusinessoperations.44MultinationalsandOutsourcingMultinationalsandOutsourcing(cont.)GreenfieldFDIiswhenacompanybuildsanewproductionfacilityabroad.BrownfieldFDI(orcross-bordermergersandacquisitions)iswhenadomesticfirmbuysacontrollingstakeinaforeignfirm.GreenfieldFDIhastendedtobemorestable,whilecross-bordermergersandacquisitionstendtooccurinsurges.45MultinationalsandOutsourcingMultinationalsandOutsourcing(cont.)DevelopedcountrieshavebeenthebiggestrecipientsofinwardFDI.muchmorevolatilethanFDIgoingtodevelopingandtransitioneconomies.SteadyexpansionintheshareofFDIflowingtodevelopingandtransitioncountries.AccountedforhalfofworldwideFDIflowsin2009.SalesofFDIaffiliatesareoftenusedasameasureofmultinationalactivity.46MultinationalsandOutsourcingFig.8-9:InflowsofForeignDirectInvestment,1980-200947Fig.8-9:InflowsofForeignDMultinationalsandOutsourcing(cont.)TwomaintypesofFDI:HorizontalFDIwhentheaffiliatereplicatestheproductionprocess(thattheparentfirmundertakesinitsdomesticfacilities)elsewhereintheworld.VerticalFDIwhentheproductionchainisbrokenup,andpartsoftheproductionprocessesaretransferredtotheaffiliatelocation.48MultinationalsandOutsourcingMultinationalsandOutsourcing(cont.)VerticalFDIismainlydrivenbyproductioncostdifferencesbetweencountries(forthosepartsoftheproductionprocessthatcanbeperformedinanotherlocation).VerticalFDIisgrowingfastandisbehindthelargeincreaseinFDIinflowstodevelopingcountries.49MultinationalsandOutsourcingMultinationalsandOutsourcing(cont.)HorizontalFDIisdominatedbyflowsbetweendevelopedcountries.Boththemultinationalparentandtheaffiliatesareusuallylocatedindevelopedcountries.ThemainreasonforthistypeofFDIistolocateproductionnearafirm’slargecustomerbases.Hence,tradeandtransportcostsplayamuchmoreimportantrolethanproductioncostdifferencesfortheseFDIdecisions.50MultinationalsandOutsourcingFig.8-10:OutwardForeignDirectInvestmentforTopCountries,2007-2009Source:UNCTAD,WorldInvestmentReport,2010.51Fig.8-10:OutwardForeignDirTheFirm’sDecisionRegardingForeignDirectInvestmentProximity-concentrationtrade-off:Hightradecostsassociatedwithexportingcreateanincentivetolocateproductionnearcustomers.Increasingreturnstoscaleinproductioncreateanincentivetoconcentrateproductioninfewerlocations.52TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)FDIactivityconcentratedinsectorswithhightradecosts.Whenincreasingreturnstoscaleareimportantandaverageplantsizesarelarge,weobservehigherexportvolumesrelativetoFDI.Multinationalstendtobemuchlargerandmoreproductivethanotherfirms(evenexporters)inthesamecountry.53TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)ThehorizontalFDIdecisioninvolvesatrade-offbetweentheper-unitexportcosttandthefixedcostFofsettingupanadditionalproductionfacility.Ift(Q)>F,costsmoretopaytradecoststonQunitssoldabroadthantopayfixedcostFtobuildaplantabroad.WhenforeignsaleslargeQ>F/t,exportingismoreexpensiveandFDIistheprofit-maximizingchoice.LowcostsmakemoreapttochooseFDIduetolargersales.54TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)TheverticalFDIdecisionalsoinvolvesatrade-offbetweencostsavingsandthefixedcostFofsettingupanadditionalproductionfacility.Costsavingsrelatedtocomparativeadvantagemakesomestagesofproductioncheaperinothercountries.55TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)Foreignoutsourcingoroffshoringoccurswhenafirmcontractswithanindependentfirmtoproduceintheforeignlocation.Inadditiontodecidingthelocationofwheretoproduce,firmsalsofaceaninternalizationdecision:whethertokeepproductiondonebyonefirmorbyseparatefirms.56TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)Internalizationoccurswhenitismoreprofitabletoconducttransactionsandproductionwithinasingleorganization.Reasonsforthisinclude:Technologytransfers:transferofknowledgeoranotherformoftechnologymaybeeasierwithinasingleorganizationthanthroughamarkettransactionbetweenseparateorganizations.Patentorpropertyrightsmaybeweakornonexistent.Knowledgemaynotbeeasilypackagedandsold.57TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)Verticalintegrationinvolvesconsolidationofdifferentstagesofaproductionprocess.Consolidatinganinputwithinthefirmusingitcanavoidholdupproblemsandhasslesinwritingcompletecontracts.Butanindependentsuppliercouldbenefitfromeconomiesofscaleifitperformstheprocessformanyparentfirms.58TheFirm’sDecisionRegardingTheFirm’sDecisionRegardingForeignDirectInvestment(cont.)Foreigndirectinvestmentshouldbenefitthecountriesinvolvedforreasonssimilartowhyinternationaltradegeneratesgains.Multinationalsandfirmsthatoutsourcetakeadvantageofcostdifferentialsthatfavormovingproduction(orpartsthereof)toparticularlocations.FDIisverysimilartotherelocationofproductionthatoccurredacrosssectorswhenopeningtotrade.Therearesimilarwelfareconsequencesforthecaseofmultinationalsandoutsourcing:Relocatingproductiontotakeadvantageofcostdifferencesleadstooverallgainsfromtrade.59TheFirm’sDecisionRegardingSummaryInternaleconomiesofscaleimplythatmoreproductionatthefirmlevelcausesaveragecoststofall.Withmonopolisticcompetition,eachfirmcanraisepricessomewhatabovethoseoncompetingproductsduetoproductdifferentiationbutmustcompetewithotherfirmswhosepricesarebelievedtobeunaffectedbyeachfirm’sactions.Monopolisticcompetitionallowsforgainsfromtradethroughlowercostsandprices,aswellasthroughwiderconsumerchoice.60SummaryInternaleconomiesofsSummary(cont.)Monopolisticcompetitionpredictsintra-industrytrade,anddoesnotpredictchangesinincomedistributionwithinacountry.Locationoffirmsundermonopolisticcompetitionisunpredictable,butcountrieswithsimilarrelativefactorsarepredictedtoengageinintra-industrytrade.61Summary(cont.)MonopolisticcoSummary(cont.)Dumpingmaybeaprofitablestrategywhenafirmfaceslittlecompetitioninitsdomesticmarketandfacesheavycompetitioninforeignmarkets.Multinationalsaretypicallylargerandmoreproductivethanexporters,whichinturnarelargerandmoreefficientthanfirmsthatsellonlytothedomesticmarket.62Summary(cont.)DumpingmaybeSummary(cont.)Multinationalcorporationsundertakeforeigndirectinvestmentwhenproximityismoreimportantthanconcentratingproductioninonelocation.

Firmsproducewhereitismostcost-effective—abroadifthescaleislargeenough.Theyreplicateentireproductionprocessabroadorlocatestagesindifferentcountries.Firmsalsodecidewhethertokeeptransactionswithinthefirmorcontractwithanotherfirm.63Summary(cont.)MultinationalcChapter8FirmsintheGlobalEconomy:ExportDecisions,Outsourcing,andMultinationalEnterprisesChapter8FirmsintheGlobalEPreviewMonopolisticcompetitionandtradeThesignificanceofintra-industrytradeFirmresponsestotrade:winners,losers,andindustryperformanceDumpingMultinationalsandoutsourcing65PreviewMonopolisticcompetitioIntroductionWheneconomiesofscaleexist,largefirmsmaybemoreefficientthansmallfirms,andtheindustrymayconsistofamonopolyorafewlargefirms.Productionmaybeimperfectlycompetitiveinthesensethatexcessormonopolyprofitsarecapturedbylargefirms.Internaleconomiesofscaleresultwhenlargefirmshaveacostadvantageoversmallfirms,causingtheindustryto

become

uncompetitive.66IntroductionWheneconomiesofIntroduction(cont.)Internaleconomiesofscaleimplythatafirm’saveragecostofproductiondecreasesthemoreoutputitproduces.Perfectcompetitionthatdrivesthepriceofagooddowntomarginalcostwouldimplylossesforthosefirmsbecausetheywouldnotbeabletorecoverthehighercostsincurredfromproducingtheinitialunitsofoutput.Asaresult,perfectcompetitionwouldforcethosefirmsoutofthemarket.67Introduction(cont.)InternaleIntroduction(cont.)Inmostsectors,goodsaredifferentiatedfromeachotherandthereareotherdifferencesacrossfirms.Integrationcausesthebetter-performingfirmstothriveandexpand,whiletheworse-performingfirmscontract.Additionalsourceofgainfromtrade:Asproductionisconcentratedtowardbetter-performingfirms,theoverallefficiencyoftheindustryimproves.Studywhythosebetter-performingfirmshaveagreaterincentivetoengageintheglobaleconomy.68Introduction(cont.)InmostseTheTheoryofImperfectCompetitionInimperfectcompetition,firmsareawarethattheycaninfluencethepricesoftheirproductsandthattheycansellmoreonlybyreducingtheirprice.Thissituationoccurswhenthereareonlyafewmajorproducersofaparticulargoodorwheneachfirmproducesagoodthatisdifferentiatedfromthatofrivalfirms.Eachfirmviewsitselfasapricesetter,choosingthepriceofitsproduct.69TheTheoryofImperfectCompetMonopoly:ABriefReviewAmonopolyisanindustrywithonlyonefirm.Anoligopolyisanindustrywithonlyafewfirms.Intheseindustries,themarginalrevenuegeneratedfromsellingmoreproductsislessthantheuniformpricechargedforeachproduct.Tosellmore,afirmmustlowerthepriceofallunits,notjusttheadditionalones.Themarginalrevenuefunctionthereforeliesbelowthedemandfunction(whichdeterminesthepricethatcustomersarewillingtopay).70Monopoly:ABriefReviewAmonoMonopoly:ABriefReviewAssumethatthedemandcurvethefirmfacesisastraightlineQ=A–B(P),whereQisthenumberofunitsthefirmsells,Pthepriceperunit,andAandBareconstants.MarginalrevenueequalsMR=P–Q/B.SupposethattotalcostsareC=F+c(Q),whereFisfixedcosts,thoseindependentofthelevelofoutput,andcistheconstantmarginalcost.71Monopoly:ABriefReviewAssumeFig.8-1:MonopolisticPricingandProductionDecisions72Fig.8-1:MonopolisticPricingMonopoly:ABriefReview(cont.)Averagecostisthecostofproduction(C)dividedbythetotalquantityofproduction(Q).AC=C/Q=F/Q+cMarginalcostisthecostofproducinganadditionalunitofoutput.AlargerfirmismoreefficientbecauseaveragecostdecreasesasoutputQincreases:internaleconomiesofscale.73Monopoly:ABriefReview(contFig.8-2:AverageVersusMarginalCost74Fig.8-2:AverageVersusMargiMonopoly:ABriefReview(cont.)Theprofit-maximizingoutputoccurswheremarginalrevenueequalsmarginalcost.AttheintersectionoftheMCandMRcurves,therevenuegainedfromsellinganextraunitequalsthecostofproducingthatunit.

Themonopolistearnssomemonopolyprofits,asindicatedbytheshadedbox,whenP>AC.75Monopoly:ABriefReview(contMonopolisticCompetitionMonopolisticcompetitionisasimplemodelofanimperfectlycompetitiveindustrythatassumesthateachfirmcandifferentiateitsproductfromtheproductofcompetitors,andtakesthepriceschargedbyitsrivalsasgiven.76MonopolisticCompetitionMonopoMonopolisticCompetition(cont.)Afirminamonopolisticallycompetitiveindustryisexpectedtosellmoreastotalsalesintheindustryincreaseandaspriceschargedbyrivalsincrease.lessasthenumberoffirmsintheindustrydecreasesandasthefirm’spriceincreases.Theseconceptsarerepresentedbythefunction:77MonopolisticCompetition(contMonopolisticCompetition(cont.)Q=S[1/n–b(P–P)]Qisanindividualfirm’ssalesSisthetotalsalesoftheindustrynisthenumberoffirmsintheindustrybisaconstanttermrepresentingtheresponsivenessofafirm’ssalestoitspricePisthepricechargedbythefirmitselfPistheaveragepricechargedbyitscompetitors78MonopolisticCompetition(contMonopolisticCompetition(cont.)Assumethatfirmsaresymmetric:allfirmsfacethesamedemandfunctionandhavethesamecostfunction.Thusallfirmsshouldchargethesamepriceandhaveequalshareofth