MARKET POWER AND MISREPRESENTATION

Transcription

1 MARKET POWER AND MISREPRESENTATION MICROECONOMICS Principles nd Anlysis Frnk Cowell Note: the detil in slides mrked * cn only e seen if you run the slideshow July

2 Introduction Presenttion concerns trding ehviour Context is n exchnge economy usul focus is on simple price-tking ut we will exmine non-competitive ehviour Use stndrd modelling frmework Endow trders with different degrees of power cptured in the trding rules Extend this to simple model of mnipultion nd design Begin with simple nlysis of nonliner prices July

3 Overview Mrket Power nd Misrepresenttion Mrket power Nonliner price systems Exchnge nd monopoly Misinformtion July

4 The setting Consider n exchnge economy Suppose one gent hs extended monopoly power Cn chrge fee for the right to ccess good 1 this cn only work for goods where resle is difficult otherwise consumers cn undermine the fee y ulk-uying nd selling on the commodity to others sometimes pulic utilities fit this prdigm Assume tht ny other trder cts s price tker Anlyse this within the context of the Edgeworth ox July

5 The model Two goods (1,2) nd two trders (Alf, Bill) Given resource distriution endowments of two goods re such tht Bill owns ll good 1 Alf: [R 1, R 2 ] = [0, R 2 ] Bill: [R 1, R 2 ] = [R 1, R 2 ] R 2 := R 2 + R 2 Trding outcomes descried y lloction vector of consumptions Alf: [, ] Bill: [, ] Use good 2 s numérire price of good 1 is p := p 1 /p 2 Assume mterils lnce condition stisfied with equlity + = R 1 + = R 2 permits use of the Edgeworth ox digrm July

6 Mrket power Suppose Bill hs the power to set the price p nd the entry fee F Then Bill cn fix udget constrint for Alf nywhere in the digrm suject to one importnt condition this hs to do with the trding rules see elow Bill s control over the udget constrint: p fixes the slope; F fixes the position In effect Bill hs the power to set non-liner price system the pir (p, F) exmine how this works: July

7 F The two-prt triff [R] 0 The endowment point Fixed chrge Price per unit p 0 July

8 *Chnging the udget constrint [R] 0 Vrying F Vrying p 0 July

9 Key condition Bill nerly hs totl control over Alf However, one thing remins in Alf s power: Alf does not hve to consume good 1 cn just consume his endowment [R 1, R 2 ] This condition effectively constrins Bill s ction Drw Alf s indifference curve through the endowment point Alf s reservtion indifference curve cnnot e forced to trde t n lloction with lower level of utility This is the oundry of Bill s ttinle set Begin with cse where Bill considers goods perfect sustitutes July

10 F Exploittion solution [R] 0 s indifference curves Endowment point s reservtion indiff curve s constrint set s indifference curves The solution Entry fee nd price [x ] p 0 July

11 Solution works in generl cse F [R] 0 Bsic model s efore s indifference curves Solution s efore [x ] p 0 July

12 Full mrket power: the result Bill hs mximl power in mrket for good 1 cn use nonliner pricing scheme sets price rtio nd entry fee to mrket for good 1 Outcome is full exploittion trding prtner is forced to reserve indifference curve solution lloction [x ] is on indifference curve through [R] But it is efficient t [x ] MRS is is the sme for oth trders so it is on the contrct curve Solution pplies for generl form of Bill s preferences July

13 Overview Mrket Power nd Misrepresenttion Mrket power Power ply in the Edgeworth ox Exchnge nd monopoly Misinformtion July

14 Using the ide of mrket power We ve chrcterised mrket power in simplified cse Bill hd uilt-in monopolistic dvntge lso endowed with complete mrket power Now use this model pply this to numer of trding stories gin in simplified world Address some key questions How relted to competitive outcomes? Under wht circumstnces will we get n efficient outcome? July

15 Trding: lterntive stories A cse with simplified property distriution Bill hs ll of commodity 1 Alf hs ll of commodity 2 Review the stndrd equilirium concepts the core competitive equilirium Exmine two polr cses 1. Bill hs complete mrket power (cn choose point in A s cceptnce set) 2. Alf hs complete mrket power Then consider limited mrket power Alf cn ct s simple monopolist July

16 Trding nd competition [R] s indifference 0 curves s indifference curves The contrct curve Endowment point Trdes cceptle to & The core CE nd prices [x*] p* 0 July

17 Bill hs totl mrket power [R] Competitive equilirium 0 s opportunity set given mrket power s optiml lloction A nonliner schedule to implement it [x*] [x ] 0 July

18 Alf hs totl mrket power [R] [x ] s opportunity 0 set given mrket power s optiml lloction A nonliner schedule to implement it [x*] 0 July

19 Simple monopoly The three stories hve common element chrcterise three points in the core ll stories hve efficient outcomes Now story with less thn complete mrket power Alf cn simply set the price Bill cts s price tker Rework the digrm first mp out Alf s ttinle lloctions then chrcterise optimum conditionl on this restricted-power model July

20 Alf cn set prices [R] 0 s preferences Endowment tries out lterntive prices s rection function s ttinle set 0 July

21 Monopoly trding [R] 0 s preferences [x] ^ [x ] Efficient lloctions (contrct curve) s monopolistic optimum MRS nd prices t optimum Competitive equilirium s totl mrket power solution ^p [x*] 0 July

22 Summry of mrket power model Suppose Alf hs mrket power Gets higher utility thn in CE Gets higher utility if hs totl mrket power thn s simple monopolist CE nd totl mrket power re efficient Simple monopoly is inefficient price = Alf s MRS price Bill s MRS July

23 Overview Mrket Power nd Misrepresenttion Mrket power Applying the simple monopoly model Exchnge nd monopoly Misinformtion July

24 Misrepresenttion The stndrd exchnge model tells simple story But relies on strong informtionl ssumption ech trder hs full informtion out the other s preferences Wht hppens if we drop this? Use the sme model s the mrket power exmple tke the cse where Alf owns good 2 Bill owns good 1 Strt from cse of perfect informtion Then suppose tht Alf misrepresents preferences Bill continues to revels full informtion July

25 Misrepresenttion nd distortion [R] ^ [x] s true 0 ICs s true ICs The contrct curve Endowment point & core CE lloction nd prices s flse IC Induced equilirium with s misrepresenttion p^ [x*] p* 0 July

26 Misrepresenttion: outcome The equilirium hs een seen efore version with Alf s misrepresented preferences sme tht for simple monopolist Opportunity to msquerde induces distortion trder with informtionl dvntge forces price in his fvour in this cse: price rtio = MRS MRS Bilterl trding is mnipulle y reveling flse preferences Alf secures higher utility for himself Wht if oth cn misrepresent? outcome is still likely to e inefficient July

27 Misrepresenttion nd distortion (2) [R] [x] ~ ^ [x] 0 True indifference curves The contrct curve & core CE lloction nd prices s flse ICs Outcome if misrepresents s flse IC Outcome if oth misrepresent p^ [x*] p* 0 July

28 Appliction Consider model of interntionl trde Alflnd exports good 2 Billestn exports good 1 Price rtio is terms of trde suppose one country cn impose triff get inefficient (monopoly) outcome suppose other country retlites with its own triff outcome my still e inefficient Sme outcomes could rise if ech country cn misrepresent preferences of its citizens Could design n efficient outcome if use nonliner prices Alflnd demnds pyment F for ccess to mrket for good 2 or vice vers for Billestn nd good 1 July