Talk:Markup rule

Arbitrary section heading (added 5/8/2014)

There's an error in the derivation involving minus signs.

e/(e+1) =/= 1/(1-n) if n = 1/e.

I believe it should be e/(e-1) in penultimate line and (1-1/e) in the line before that. — Preceding unsigned comment added by 69.143.10.147 (talk) 00:38, 23 March 2012 (UTC)

Sort of. You are right that those are not equal, but you are wrong about what the penultimate line should be. This should look like

$\epsilon /(\epsilon +1)=1/(1+\eta )$

This is also still incorrectly stated in the first paragraph (it says "minus" where it should say "plus"). And after the derivation, it says that $\eta$ is greater than $zero$, which is false. I imagine that the original version had $\eta$ as the opposite of the reciprocal of $\epsilon$. I am correcting these. If anyone has a problem with this change, say something, but it needs to be done now, since the current version could be very misleading.Rscragun (talk) 02:03, 15 March 2014 (UTC)

"Inverse" is used incorrectly multiple times. The correct word is "reciprocal". I am changing this.Rscragun (talk) 02:03, 15 March 2014 (UTC)

I am changing the wording in the last sentence to recognize that price elasticities of demand are negative, because the current wording will confuse readers who are not very familiar with the field.Rscragun (talk) 02:03, 15 March 2014 (UTC)

I am not sure that the last paragraph belongs here.Rscragun (talk) 02:03, 15 March 2014 (UTC)

I believe that this page needs to make it clear how a monopolist would respond to non-isoelastic demand. The page makes it seem like the demand elasticity is a constant parameter to which the monopolist responds. However, what really happens is that firm chooses a quantity where the demand price meets the criterion given rather than simply choosing the price that meets that criterion. In other words, for a given demand curve, ${\frac {1}{1+\eta }}MC$ takes on infinite values depending on the position along the demand curve. I put something in to communicate this idea, but it needs work.Rscragun (talk) 02:03, 15 March 2014 (UTC)

A user sent me the following message on my user page, which is not an appropriate use of a user page. All correspondence regarding an article should always appear on the talk page for that article or on the page for the project that manages that article.

You're misunderstanding the difference between "Accounting Cost" and "Economic Cost"; and this is leading you to misuse what is solely an Accounting Term by indicating it is also an Economics Term. There is no "Cost-Plus-Markup" in Economics (the term is solely used in American Accounting); there is only a "[Monopoly profit] Term" in Economics. The firm sets a "Monopoly Price" in order to ensure it has a "[Monopoly profit]". Yes, the "Monopoly Price" is above the "Marginal (Economic) Cost" of the firm; but a "Competitive Price" within a Competitive Market usually includes a "Cost-Plus-Markup"! I.e., since the "Cost-Plus-Markup" usually contains "Accounting Profit" that goes to the firm's Equity owners (the firm's owners). The Equity Owner must get at least a "Rate of Return on Equity" that is no smaller than the Rate of Interest on Debt because the Rate of Interest on Debt is actually an "Economic Cost" (or "Opportunity Cost") associated with holding onto Equity instead of Debt; resulting from the fact that the Equity Holder must forgo the certain Interest he could obtain on the same dollar amount in Debt when he buys Equity (Shares) in the firm. So, the "Accounting Profit" associated with the "Cost-Plus-Markup" is actually better associated with "Economic Cost"; and the the "Cost-Plus-Markup" will exist in a firm with no [Monopoly profit] in order to compensate Equity Owners for the "Economic Cost" associated with having to give up Interest Revenue in order to purchase (Shares) of the firm's Equity. In such a firm, with no [Monopoly profit], Marginal Cost = Price = Marginal Revenue, and the "Cost-Plus-Markup" is solely an "Economic Cost" within a "Competitive" (non-Monopoly) situation.

Therefore, I am removing the reference to "Markup" in this section. Instead, I will refer to "Monopoly Profit", such that the "Monopoly Price" occurs when the "Marginal Revenue" = "Marginal Cost", but is well below the "Monopoly Price. The Competitive Cost-Plus-Markup is well below the Monopoly "Unit Contribution Margin" (going back to the appropriate Accounting term to verbally represent the Monopoly Profit). Please note that the Monopoly "Unit Contribution Margin" is much greater than the Unit Monopoly Profit; since you must deduct the Normal Competitive "Cost-Plus-Markup" from the Monopoly "Unit Contribution Margin" in order to calculate the per unit Monopoly Profit (the difference between Marginal Economic Cost and the Price). MGMontini (talk) 19:27, 25 April 2014 (UTC)

Much of this is incomprehensible. It is my belief that there is no indication in this article that misrepresents economic and accounting costs. I am an economist, but I have almost no knowledge of accounting, so I personally was certainly not using accounting terms. The claim that "markup" is not used in economics is blatantly false. It hear it all the time in this exact context. Furthermore, "markup" is in the name of the article, so you cannot remove references to it.Rscragun (talk) 23:14, 25 April 2014 (UTC)

Rscragun,

You're misunderstanding the difference between "Accounting Cost" and "Economic Cost"; and this is leading you to misuse what is solely an Accounting Term by indicating it is also an Economics Term. There is no "Cost-Plus-Markup" in Economics (the term is solely used in American Accounting); there is only a "[Monopoly profit] Term" in Economics. The firm sets a "Monopoly Price" in order to ensure it has a "Monopoly profit". Yes, the "Monopoly Price" is above the "Marginal (Economic) Cost" of the firm; but a "Competitive Price" within a Competitive Market usually includes a "Cost-Plus-Markup"! I.e., since the "Cost-Plus-Markup" usually contains "Accounting Profit" that goes to the firm's Equity owners (the firm's owners). The Equity Owner must get at least a "Rate of Return on Equity" that is no smaller than the Rate of Interest on Debt because the Rate of Interest on Debt is actually an "Economic Cost" (or "Opportunity Cost") associated with holding onto Equity instead of Debt; resulting from the fact that the Equity Holder must forgo the certain Interest he could obtain on the same dollar amount in Debt when he buys Equity (Shares) in the firm. So, the "Accounting Profit" associated with the "Cost-Plus-Markup" is actually better associated with "Economic Cost"; and the the "Cost-Plus-Markup" will exist in a firm with no Monopoly profit in order to compensate Equity Owners for the "Economic Cost" associated with having to give up Interest Revenue in order to purchase (Shares) of the firm's Equity. In such a firm, with no [Monopoly profit], Marginal Cost = Price = Marginal Revenue, and the "Cost-Plus-Markup" is solely an "Economic Cost" within a "Competitive" (non-Monopoly) situation.

Therefore, I am removing the reference to "Markup" in this section. Instead, I will refer to "Monopoly Profit", such that the "Monopoly Price" occurs when the "Marginal Revenue" = "Marginal Cost", but is well below the "Monopoly Price. The Competitive Cost-Plus-Markup is well below the Monopoly "Unit Contribution Margin" (going back to the appropriate Accounting term to verbally represent the Monopoly Profit). Please note that the Monopoly "Unit Contribution Margin" is much greater than the Unit Monopoly Profit; since you must deduct the Normal Competitive "Cost-Plus-Markup" from the Monopoly "Unit Contribution Margin" in order to calculate the per unit Monopoly Profit (the difference between Marginal Economic Cost and the Price).

MGMontini (talk) 19:27, 25 April 2014 (UTC)

Rscragun,
I have a Graduate degree in Economics associated with Ph.D Economics Classes, and have worked as a Senior Accountant for 20 years (with the education that is also enough to qualify for the CPA in America). Not once have I ever heard of the word "Markup" in any "Economics" discussion. Solely in a discussion dominated by "Accountants". Please, indicate to me a Graduate Level College Economics Text book that uses the term "Markup" in talking about "Economic Profit". You do not have enough citations here! You also show no mathematical derivation for your Monopoly formula (I still have to check that for correctness - however it seems correct at first glance). What I have said is not false! Please submit the appropriate references to back up your discussion.

This Article was obtained from a redirect from "Monopoly Price"; and the reference about the use of the Elasticity of Demand is directly associated with "Monopoly Price" and the related "Monopoly Profit"! There is definitely something wrong with the Title of the Article, its redirect, etc. Rules are that you give references; why aren't there associated references for your use of the term "Markup" as you are using it for "Economics"??? Thanks.

Finally please direct me to the "Talk" page in which I can make these comments for all to see. I truly believe any "Economist" would not find what I said above "incomprehensible". Thanks.MGMontini (talk) 20:18, 25 April 2014 (UTC)

Stop being a jerk. If you want to discuss things here, then your words need to be more clear. If your complaint is just about the use of the word "markup", then I can find examples of that. If you are complaining about something else, then say so in a clear and concise way. Also, I have no idea why you think that there is "no mathematical derivation for [the] Monopoly formula". It is very obvious, since it takes up half the article. Last: none of this is my use of the term. This is a collaborative work--not just my work.Rscragun (talk) 21:27, 25 April 2014 (UTC)

I will edit the grammar and sentence structure from your last edit. I am not sure that I see much of a reason to change much of it. I think that you should add some clarification that when you describe "The normal Markup rule" you mean to differentiate this from the economic idea of simple monopoly pricing.Rscragun (talk) 21:35, 25 April 2014 (UTC)

Your edits make the article flow very poorly. The sentences are in a strange order, and there is much that is redundant. I have shown that this word is used how the article used it months ago, so please undo your severe gutting of the readability of the article.22:34, 25 April 2014 (UTC)Rscragun (talk)

I've adjusted a bit of the grammer er your suggestion. I've also shown the mathematical derivation in a bit more (I hope) understandable detail. I used much of your own verbage; but just added to it when I though some clarification might be had. Please review, and get back to me. I think it is inappropriate to call me a "jerk"; but I will not raise issue with this at this time as long as it ceases. MGMontini (talk) 03:36, 30 April 2014 (UTC)

Markup rule or monopoly price?

The first two paragraphs of this article are about monopoly price. The title of the article is Markup rule. Wikipedia style as explained at WP:LEAD is that "the lead serves as an introduction to the article and a summary of its most important aspects." I'm not sure what has gone wrong here, and don't know enough about economics to fix it, but the article is not serving the reader now. Anybody able to fix this? Thank you. SchreiberBike talk 04:54, 8 May 2014 (UTC)

Thank you @Volunteer Marek:. That was quick. SchreiberBike talk 05:02, 8 May 2014 (UTC)

Np. Volunteer Marek (talk) 05:04, 8 May 2014 (UTC)

mark up rule ...

... not just limited to monopolies. Monopolistic competition and certain types of competition in oligopolistic markets also give the markup rule.

Also that one big paragraph in the lede was hopelessly confusing, so I just removed it. If someone wants to make the effort to make it at least semi coherent, then some of it could be put back in.Volunteer Marek (talk) 04:56, 8 May 2014 (UTC)

My understanding of the "Markup Rule", at least as it exists in American Accounting and American Finance, is a proportional "Markup" on the existing Accounting Costs. Those who have studied Economics know that Accounting Costs are not the same as Economic Costs (See the wiki section on Cost). This is the entire basis for my disagreement on the "definition" and "explanation" of "Markup" as it was done previously and as it is presented now. The Math that previously showed how a firm (theoretically) calculated "Markup" is actually the Calculus (an MIT) graduate level Economics Textbook indicates is the decision making process in formulating both "Monopoly Price" and the per unit "Monopoly Profit". The reference here that there is no association between the way this article was previously written (see the history of the writing) and its association with "Monopoly Price" (and thereby "Monopoly Per Unit Profit") is further contradicted by the Wiki linking of "Monopoly Price" to this "Markup" page! Talk about confusing!!! How could one dis-associate a discussion of Monopolies with the discussion on "Markup" discussion when (i) Wiki automatically links "Monopoly Price" to this "Markup" page, (ii) the Calculus (originally) explaining "Markup" is the same Calculus that explains "Monopoly Price" and "Monopoly Profit" in all (Graduate level) Economics textbooks.

I would like to cover your point on "Monopolistic Competition". "Monopolistic Competition" many times is associated with "niche markets", within which a single firm produces a good that is "Unique" within an industry that contains firms that produce similar goods that do not have all of same qualities (characteristics). The General Demand for the "unique" qualities the (Monopolistic Competitive) firm puts into its product is not large enough Demand to support an industry of many competing firms that produce the same homogeneous good (with all of the same qualities/characteristics). The other firms that produce "similar" products also produce goods with "unique characteristics" that differ from the other "similar" goods produced by their "competitors". Hence, the Goods/Products are not homogeneous, and each firm is a "monopoly" for its particular good with its particular and unique qualities that differ from all other goods produced by other firms. This is why a firm within "Monopolistic Competition" faces a downward sloping Demand Curve, and maximizes its "Economic Profit" by setting Marginal Revenue equal to Marginal Cost. If this were not the case (more than 1 firm in the industry produces the same homogeneous product with all of the same qualities and characteristics), then the industry would be an Oligopoly using (for example) a "Cournot Solution" (see any of my cited college and graduate level textbooks for details), or would be a "Competitive Firm" facing a purely horizontal Demand Curve that is the same as the horizontal Marginal Revenue Curve it faces. This is "Economic Theory" that is usually learned at the undergraduate level by the time a student reaches Intermediate Micro-Economics within his undergraduate course-work!

I have to say, it behooves me that I must explain these very basic Neo-Classical Micro-Economic principles as they appear within very basic undergraduate textbooks in order to "defend" a very general explanation to the general public (including high school students and freshman year college students) that does not totally contradict accepted Neo-Classical Micro-Economic Theory! But, "personalities" and "pride" being as they may, I will attempt to give the general public an adequate explanation that is basic and normal accepted Micro-Economic Theory in Accredited Universities with Economics Programs. I hope my discussion is "Coherent" enough for you all to be able to understand and comprehend the erroneous parts of much of the discussions that have been laid down (and those within the original article) thus far. If the discussion I have laid down thus far is not "Coherent" enough, I recommend that you go to any of the Graduate Level Economics Textbooks and Undergraduate Economics Textbooks I have referenced in my writings for a more Coherent discussion that will help you understand the points I am making here.

I will change the Redirect wikipedia uses to direct those looking up "Monopoly Price" to another page containing the explanation for "Monopoly Price". There I will place a full explanation of Monopoly Price along with all of the proper textbook references (you can all look up for yourselves at the local public/university library) as is demanded by normal Wikipedia Standards. I venture to say that the Calculus (Math) used to explain the theoretical underpinning of how "Markup" is established by a firm had no suithin the original article had no such citations/references. How could that have been let go as being appropriate, yet I am being challenged on basic Neo-Classical Micro-Economic Principles that I have traced to both undergraduate and graduate Economics textbooks that have been used in accredited universities with Economics programs???MGMontini (talk) 17:00, 12 May 2014 (UTC)

Yes (for the record, I stopped reading the above after a certain point), the term "Mark-up pricing" is used both in Accounting and Economics and has a somewhat different meaning. In Economics, the term refers to mark up over marginal cost, as this article explains. In Accounting usually it means mark up over unit (accounting) costs. Under some conditions these two can be the same, generally, they're not. I have no objection what so ever to there being a section in the article about the accounting meaning of the term. Provided it's coherent, sourced, stays on topic, and not too long.Volunteer Marek (talk) 02:13, 13 May 2014 (UTC)

Thank you for at least understanding my point. Just "theoretically" (and "Practically Speaking"), how could there ever be a "Markup" on Marginal Cost in any truly "Competitive" Situation unless there is an Oligopoly within the given industry? In a truly ("Perfectly") Competitive situation, any such "Markup" on Marginal (Economic) Cost would be impossible without some sort of "Barriers to Entry". Is this "Markup rule" on Marginal (Economic) Cost qualified in the explanations found within the literature used in accredited Universities running PhD Programs in Economics? If it is, it must be relatively new; as it was not talked about (except in American Accounting) within the Economics Program I was in.

I have no objection to "fixing" sentence structure if needed; however the basic theoretical statements must remain since they are still a part of accepted Neo-Classical Micro Economic Theory taught in Undergraduate programs within accredited Universities.

I did not read all of this, but I appreciate that people are trying to clearly identify whether or not the article is about the economic term or the accounting term. We had a user on here who was convinced that the economic term simply did not exist, and in his efforts to destroy the page he made it something incomprehensible. I think there should be a sentence or two explaining that this is an economic term referring to economic costs and then explaining that there is similar terminology in accounting, finance, etc. However, I am not qualified to write accounting entries, so someone else should do it.Rscragun (talk) 20:57, 27 June 2014 (UTC)

Merge

I think that this article should be merged with other articles on monopolies and monopoly pricing. Seaches, etc., can redirect to this section within those articles.Rscragun (talk) 20:59, 27 June 2014 (UTC)

@Rscragun:

Volunteer Marek above says the "Markup rule" is "... not just limited to monopolies. Monopolistic competition and certain types of competition in oligopolistic markets also give the markup rule." Furthermore, there is no adequate indication in this section that it pertains solely to a "Monopoly" (a 1-firm industry) even though the mathematics shown is for a monopoly. The reader needs to know the difference between a monopoly's "Markup rule", an oligopoly's "Markup rule" and (what is essentially) the "Markup rule" for a Perfectly Competitive firm.

Of course the Profit maximization rule for a duopoly (a 2-firm industry) is not the same as the maximization rule for a monopoly (a 1-firm industry), since the "Markup rule" for a "Monopoly" is

Max: P(Q_{Entire Ind}) * Q_{Entire Ind} - C(Q_{Entire Ind})

or

P'(Q_{Entire Ind}) * Q_{Entire Ind} + P(Q_{Entire Ind}) = C'(Q_{Entire Ind}).

Marginal Revenue = Marginal Cost,

and the "Markup rule" for the duopoly is

Max: P(Q_{Entire Ind}) * Q_firm - C(Q_firm)

s.t. Q_{Entire Ind} = Q_firm + Q_{other firm}

yielding

P'(Q_{Entire Ind}) * Q_firm + P(Q_{Entire Ind}) = C'(Q_firm).

Obviously, the statement "oligopolistic markets also give the markup rule" is actually incorrect when you consider the Monopoly Profit Maximization mathematics within this "Markup rule" section! If you look at the Monopoly price section, you will see the fact that a "Monopoly price" is unique to the 1-firm "Monopoly market", and the definition of the monopoly and the explicit indication of this fact is properly written in that section. Likewise, the "Monopoly profit" section clarifies the "economic profit" for the "Monopoly" is significantly different than it would be for other markets (such as Oligopoly and Perfectly Competitive markets). When the description of "Monopoly" variable is discussed, the clarification that it pertains solely to a "Monopoly" is essential since the monopoly market is unique. The uniqueness of the monopoly market is further shown by the fact that (in many cases) anti-trust laws in both the USA and the EU formally make monopolies illegal, even as oligopolies tend to be legal. None of that is covered here. Therefore, a set of specific "Monopoly" sections are indeed needed for "Monopoly price" and "Monopoly Profit". Separate sections are also needed for "Oligopolies" as well since they are (as you can see from the mathematics above) significantly different from the "Monopoly". This is basic Neo-Classical micro-economic theory!

If you want to keep a general discussion on "Markup rule" on "economic costs", that is fine; but I recommend that you add a very brief reference to the multi-firm situation you find in both oligopolies and Perfect Competition, as well as a brief reference to (niche) markets that have "Monopolistic Competition". This allows you to keep this a general concept to briefly inform the reader a little about it's existence, and referring the reader to other more specific sections if and only if they want more "detail" concerning "Monopolies", "Monopolistic Competition" and "Oligopolies". MGMontini (talk) 14:25, 18 July 2014 (UTC)

I think your point is that the ideas in this section cannot be merged because there is no single other page that would suitably contain the pricing decisions in each of these market structures. That is a good point. Would you be willing to write the additions you have suggest? I am too busy now to do it. — Preceding unsigned comment added by Rscragun (talk • contribs) 22:05, 8 October 2014 (UTC)