In which scenario would consumers have the most bargaining power, leading to a maximum value for consumer surplus ?

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BlackTom AI · Accepted Answer

To assess where consumer surplus is maximized, we need to think about how competition in input and output markets affects prices and quantities.
Option 1: A non-competitive input market and a non-competitive output market. In this setup, both stages have market power, which tends to push up prices (inputs) and the final price for consumers (outputs), reducing consumer surplus overall. The lack of competition typically depresses the quantity traded at efficient prices, harming consumer welfare.
Option 2: A non-competitive input market and a non-competitive output market. This is similar to Option 1 and even more strongly biased toward higher prices for consumers due to market power at both stages. Consumer surplus would be lower because prices are less constrained by competitive pressures, and output quantity is not maximized by efficiency.
Option 3: A perfectly competitive input market and a perfectly competitive output market. Here, competition at both stages drives prices toward marginal cost and allocates resources efficiently. Prices paid by consumers are minimized (relative to less competitive settings) and quantities produced are maximized given demand, which expands the area under the demand curve that consumers benefit from—i.e., higher consumer surplus.
Option 4: A non-competitive input market and a perfectly competitive output market. Even though the output market is competitive, the non-competitive input market can raise input costs, which can be passed on to consumers as higher prices. This tends to reduce consumer surplus compared with a fully competitive setup, because higher input costs can translate into higher final prices or reduced quantity.
Overall, consumer surplus is largest when competition is present both upstream and downstream, since prices reflect true costs and consumers capture more of the gains from trade. The mixed or fully non-competitive cases tend to restrict consumer welfare relative to full competition.

In which scenario would consumers have the most bargaining power, leading to a maximum value for consumer surplus ?

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