Question

A small town is served by many competing supermarkets, which have constant marginal cost. a Using a diagram of the market for groceries, show the consumer surplus, producer surplus and total surplus. Now suppose that the independent supermarkets combine to form one chain. Using a new diagram, show the new consumer surplus, producer surplus and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss? b

Answer 1

a.

Consumer Surplus Pe Qe

As the grocery stores are in perfect competition all of the stores are selling at marginal cost, the equilibrium point is where MC curve intersects with the demand curve. So the area above the intersection of supply and curve is consumer surplus and producer surplus being zero. As the total surplus is the sum of consumer surplus and producer surplus, total surplus is exactly equal to the consumer surplus.

b.

Consumer Surplus Pe Deadweight loss Producer Surplus MR Qe

When all the grocery stores form a chain it leads to formation of monopoly where the price is above the intersection of MC and MR curve.
Total surplus = Sum of Producer Surplus (blue rectangle) + Consumer Surplus (red triangle)
The area of producer surplus is the transfer from consumer to producers
Dead weight loss is the area of black triangle