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Price Settings on the Supply Side

24 April, 2015 - 11:52

Learning Objectives

  • Explain and illustrate how a monopoly supplier of some factor of production maximizes profit.
  • Discuss some of the ways that labor unions try to exercise market power.
  • Define bilateral monopoly and explain and illustrate why prices in the model are indeterminate.
  • Explain how professional associations and producers’ cooperatives affect supply.

Buyers are not the only agents capable of exercising market power in factor-pricing choices. Suppliers of factor services can exercise market power and act as price setters themselves in two ways. First, a supplier may be a monopoly or have a degree of monopoly power in the supply of a factor. In that case, economists analyze the firm’s choices as they would analyze those of any other imperfectly competitive firm. Second, individual suppliers of a factor of production may band together in an association to gain clout in the marketplace. Farmers, for example, often join forces to offset what they perceive as unfair market power on the part of buyers of their products. Workers may join together in a union in order to enhance their bargaining power with their employers. Each case is discussed below.