Group 2

Buyer Power

Monopsony is an imperfect market condition which exists when a market features a single buyer
of a desired product or input. Monopsony power enables the buyer to obtain lower prices than
those that would prevail in competitive markets. Examples are local labor markets with a single
major employer and local agricultural markets with a single feed mill or grain buyer. Monopsony
is more common in factor input markets than in markets for final demand.

In terms of economic efficiency, monopsony is the least harmful, and is sometimes beneficial; in
those markets in which a monopsony buyer faces a monopoly seller, a situation called bilateral
monopoly arises. For example, consider the case of the town in which one large manufacturer is
the sole employer of unskilled labor. The manufacturer is a monopsony because it is a single
buyer of labor, and it may be able to use its power to reduce wage rates below the competitive
level. If workers organize a union to bargain collectively with their employer, a single monopoly
seller of labor is created that could offset the employer’s monopsony power and increase wages
toward competitive market norms.

Bilateral Monopoly Illustration

The following illustration shows the effects of a bilateral monopoly that might occur when Home
Depot, the nation’s second-largest retailer, deals with Whirlpool Corporation, producer of
Maytag brand appliances. Maytag appliances have a long-standing reputation for dependability
and quality, and are a key offering in Home Depot stores. At the same time, the Home Depot is
a major customer for Maytag. For illustration purposes, assume that competitive market demand
and supply relations for Maytag’s high-efficiency gas dryer are:

P $1,080 − $2Q (Demand)

P $180+$8Q (Supply)

where P is price and Q is output (in thousands). The competitive market price/output solution is
found by setting the demand curve equal to the supply curve and solving for price and output:

Demand = Supply
$1,080 − $2Q = $180+$8Q
10Q = 900
Q =90 (000)
Solving for price gives
P = $1,080 − $2(90) = $900 per unit (Demand)
P = $180 + $8(90) = $900 per unit (Supply)

In competitive market equilibrium, there exists perfect balance between buyer and seller power.
Nieither has an upper hand. This result contrasts with both the unrestrained monopoly and
unrestrained monopsony price–output solutions. Markets with unrestrained monopoly feature
higher than competitive market prices. In markets with unrestrained monopsony, lower than
competitive market prices are observed.

The outcome observed in unrestrained monopoly equilibrium is found by setting the seller’s
marginal revenue equal to marginal cost. In this case, Maytag’s optimal price–output
combination can be determined by setting its marginal revenue equal to marginal cost (from the
supply curve) and solving for Q:
MR = MC
$1,080 − $4Q = $180 + $8Q
12Q = 900
Q = 75

The monopoly seller’s preferred price for this output level can be determined from the demand
curve, which depicts the maximum price buyers are willing to pay for this level of output:

PM = $1,080 − $2Q
= $1,080 − $2(75)
= $930

Unrestrained monopoly results in higher than competitive market prices. As a result, buyers pay
more than the marginal cost of production.

The outcome observed in unrestrained monopsony equilibrium is found by setting the buyer’s
(the Home Depot’s) marginal cost curve equal to the demand curve. First, it is necessary to
derive the buyer’s marginal cost curve by taking the first derivative of the buyer’s total cost
derived from the market supply curve:

Buyer’s Total Cost = P x Q

= ($180+$8Q)Q
= $180+Q$8Q^2

Buyer’s Marginal Cost = ∂TC / ∂Q

= $180+$16Q

Once this relationship depicting the buyer’s marginal cost curve has been determined, the
amount that would be purchased in unrestrained monopsony equilibrium is found by setting the
buyer’s marginal cost equal to the market demand curve, which represents the buyer’s marginal
revenue from purchases, and solving for quantity:

Buyer’s Marginal Cost = Buyer’s Marginal Revenue

$180 + $16Q = $1,080 − $2Q
18Q = 900
Q = 50 (000) units
The monopsony buyer’s preferred price for this output level can be determined from the supply
curve, which depicts the minimum price required to attract this level of output:

PB = $180 + $8Q
= $180 + $8(50)
= $580

Unrestrained monopsony results in lower than competitive market prices. As a result, suppliers
get paid less than the amount of economic value received by buyers. Such low prices are
inefficient in that they result in too few workers being hired, and too little output being produced.

Bilateral monopoly moderates the price–output outcomes observed in unrestrained monopoly

and unrestrained monopsony markets. Depending on the relative power of the seller and the
buyer, either an above-market or a below-competitive market price will result. If a monopoly
seller has the upper hand, higher than competitive market prices prevail. If a monopsony buyer
has the upper hand, lower than competitive market prices will prevail.

Overview of Antitrust Law

Antitrust laws are designed to promote competition and prevent unwarranted monopoly. By
itself, large firm size or market dominance is no offense; it is any unfairly gained competitive
advantage that is against the law.

Antitrust laws are applied to a wide range of questionable business activities, including but not
limited to market allocation, bid rigging, price fixing, and monopolies.If these laws didn't exist,
consumers would not benefit from different options or competition in the marketplace.
Furthermore, consumers would be forced to pay higher prices and would have access to a
limited supply of products and services.

Antitrust Laws
US: Sherman and Clayton Acts

The first federal antitrust legislation is the Sherman Act passed in 1890. This law banned
businesses from colluding or merging to form a monopoly and thus prevent them from dictating,
controlling, and manipulating prices in a particular market. This act aimed to promote economic
fairness and competitiveness while regulating interstate commerce.

However, this act only declared the monopoly illegal. It being in vague language had provided
large corporations with numerous loopholes, enabling them to engage in certain restrictive
business arrangements that, though not illegal per se, resulted in concentrations that had an
adverse effect on competition.

Because of the weaknesses of the Sherman Acts, the Congress passed another laws and these
are:
a. Clayton Act - which addressed the problems of mergers, interlocking directors, price
discrimination, and tying contracts; and
b. Federal Trade Commission Act - which bans unfair methods of competition and unfair or
deceptive acts of practices.

PH: Philippine Competition Act

Before the passage of the Philippine Competition Act, the Philippines has been without a
comprehensive antitrust law. The anticompetitive conduct was coursed from various isolated
provisions scattered across various pieces of general legislation, including the Revised Penal
Code, and the mandate of the Constitution to “protect Filipino enterprises against unfair
competition and trade practices.”

Philippine Competition Act or R.A 10667 was signed into law on July 21, 2015 and came
into effect on August 8 of the same year. It is the primary competition policy of the Philippines
for promoting and protecting the competitive market. Enforcement of this law will help ensure
that markets are open and free, challenging anticompetitive business practices while
maintaining an environment where businesses can compete based on the quality of their work.

The following are the key aspects of the law:

a. Prohibits entities from entering into anti-competitive agreements
b. Prohibits abuse of their dominant position by entities
c. Sets out a framework for the compulsory notification of mergers and acquisitions where
the value of the transactions exceeds Php 1 billion.
d. Prohibits mergers and acquisitions which substantially prevent, restrict or lessen
competition
e. Administrative fines and, in some cases, criminal penalties for breach of the law

Market Niches

What is unique about monopoly is the potential for long-lasting above-normal profits.
Above-normal profit rates can be observed if monopoly firms temporarily benefit from some
unanticipated increase in demand or decrease in costs. Similarly, monopolists can benefit from
temporary affluence due to unexpected changes in industry demand or cost conditions or
uniquely productive inputs.

With the advent of technology and globalization, however, no monopoly is permanently

secure from the threat of current or potential competitors. Product characteristics, the local or
regional limits of the market, the time necessary for reactions by established or new
competitors, the pace of innovation, unanticipated changes in government regulation and tax
policy, etc. all play an important role in defining the scope and durability of monopoly power.

However, only new and unique products or services have the potential to create
monopoly profits. Imitation of such products may be protected by patents, copyrights, or other
means. In many instances, above-normal profits reflect the successful exploitation of a market
niche. A market niche is a segment of a market that can be successfully exploited through the
special capabilities of a given firm or individual. To be durable, above-normal profits derived
from a market niche must not be vulnerable to imitation by competitors.
Information Barriers to Competitive Strategy

Accounting profit data from a historical viewpoint is useful for operational and tax
choices. However, these data are not always accurate. Even though they can produce long-
term economic gains, advertising and R&D expenses are expensed for reporting and tax
purposes. Advertising and R&D expenses treated as incurred might contribute to profit
measurement inaccuracies. Business profit rates like ROE can significantly understate
economic profits. However, other flaws in accrual accounting lead to mismatched revenues and
costs, and so misstatements of economic profits over time.
Accounting data has obvious limits, but corporate policies are generally designed to
prevent the loss of vital trade secret information. Business procedures establish an information
barrier that hides the true details of economic profit rates. In addition, it obscures the costs and
benefits of entering monopoly markets from both private and public decision-makers.