|
Monopoly Markup
A markup rule is the pricing practice of a producer with market power, where a firm charges a fixed mark-up over its marginal cost.Roger LeRoy Miller, ''Intermediate Microeconomics Theory Issues Applications, Third Edition'', New York: McGraw-Hill, Inc, 1982.Tirole, Jean, "The Theory of Industrial Organization", Cambridge, Massachusetts: The MIT Press, 1988. Derivation of the markup rule Mathematically, the markup rule can be derived for a firm with price-setting power by maximizing the following expression for profit (economics), profit: : \pi = P(Q)\cdot Q - C(Q) :where :Q = quantity sold, :P(Q) = inverse demand function, and thereby the price at which Q can be sold given the existing demand :C(Q) = total cost of producing Q. : \pi = economic profit Profit maximization means that the derivative of \pi with respect to Q is set equal to 0: :P'(Q)\cdot Q+P-C'(Q)=0 : where :P'(Q) = the derivative of the inverse demand function. :C'(Q) = marginal cost–the derivative of total c ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Market Power
In economics, market power refers to the ability of a theory of the firm, firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of the gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict Perfect competition, perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are cons ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
