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Pastimes : Austrian Economics, a lens on everyday reality -- Ignore unavailable to you. Want to Upgrade?

To: Wildstar who wrote (321)	11/25/2003 12:28:38 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 445

Wildstar, To summarize my understanding so far, assuming a monopoly supplier of a consumer good - The individual consumers each have their own subjective preferences for that particular consumer good, other consumer goods, and money. In the aggregate, this results in a price vs. demand curve for that particular consumer good which has a point at which maximum revenues are generated by the supplier. This point (PEAK) defines a price, volume exchanged, and revenues generated. The monopoly supplier may not always be able to set the price at PEAK for various reasons. Yes. We need to keep in mind here that we are talking about all costs being either sunk or non-interfering with the achievement of the PEAK price. The 'various reasons' of which I am currently aware would include a marginal cost of replacement above the PEAK price and a limitation of available supply that would not satisfy the amount demanded at the PEAK price. ------------------------------------------------------- Suppose further that the manufacture of this consumer good requires a nonspecific factor of production (NFOP) and a specific factor of production (SFOP). The price of the NFOP is determined by the marginal buyer of that NFOP, which may or may not be (but likely is NOT) the monopoly supplier of the consumer good. Yes, except it is the combination of the marginal buyer and the marginal seller matching supply to demand. The price of the SFOP is directly imputed by the monopoly supplier of the consumer good, since no other buyers of that SFOP exist (although numerous sellers may exist). It will be determined from bargaining between the single buyer of that SFOP and the marginal seller of SFOP. There are possible issues here that I'm not ready to form a judgment on. -- I think that the Austrian use of the word 'impute' is used in a slightly different way. Factor prices are imputed from the subjective valuations of consumers. -- There is a question as to whether it is the seller of the consumer product or the supplier of the SFOP that is effectively the monopolist and who reaps the profits. Different cases may be different. ------------------------------------------------------- For the monopoly supplier of a consumer good, charging a price higher than PEAK quickly results in a sharp drop in total revenues. I would quibble with 'quickly' and 'sharp'. It is in the competitive case where inching the price above competitors quickly results in sharp drops due to the fact that the subdemand curve seen by a given supplier is likely to be much different in shape and slope than the demand curve for the total market. Since the price of the NFOP is set by other buyers, the only real bargaining power the monopoly consumer good supplier has is in the buying of the SFOP. I think that the emphasis is backwards here. There is no need to bargain for a NFOP because it generally already has a lower price than it needs to have. The alternate uses of the NFOP will usually provide it at a bargain price. The difference between the price at PEAK and the price of the NFOP (and all other NFOPs if applicable) is what remains to buy the SFOP. If the price of the SFOP were greater than this difference, the monopoly supplier of the consumer good could not stay solvent, because if it tried to set consumer good prices higher than PEAK, it would quickly slide down the price vs. revenues curve. The word 'quickly' is again in question. This is a guess, but I think what may happen is that the marginal replacement cost is the sum of the cost of the NFOPs and the cost of the SFOP and the price will move up to the point where they're equal and the owner of the SFOP will reap all of the profits. However, this may simply mean that the optimization problem has shifted to the owner of the SFOP, and the price may not move up at all as he maximizes his revenue with a different set of possible constraints. ------------------------------------------------------- Summary - The monopoly supplier of a consumer good usually only has bargaining power over SFOPs and thus, the subjective valuations of consumers set the price of the consumer good and therefore the SFOPs. I think that the issue is that there is nothing that economics can say about where in a range the price of the SFOP ends up. The buyer and the seller of the SFOP must bargain, but who has more power is an open question. That is not to say that the subjective valuations of consumers do not also set the prices of NFOPs, but rather that in the case of NFOPs, the marginal buyer of that NFOP will be the 'middleman' through which this happens. Yes. The subjective valuations of consumers for other consumer products which share common NFOPs are what determine the part of the cost of a given consumer product that comes from its NFOPs. In the case of SFOPs, the marginal buyer of the factor of production is the monopoly supplier of the consumer good. The monopoly supplier of a consumer good must be the only buyer of a SFOP by definition. Regards, Don