Lecture : Monopoly

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Lecture ?Monopoly

• EEP 1
• Peter Bercks Class

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Who is this guy who thinks hes funny?

• Maximilian Auffhammer
• Assistant Professor IAS/ARE
• auffhammer_at_berkeley.edu

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Lets Deviate From Perfect Competition

• No Market Power
• Perfect Information
• No Externalities
• No Public Goods
• Look at Market Power first.

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Monopoly

• Monopolist Only supplier of a good with no close
  substitute.
• Firm output Market output
• Firm faces market demand curve, not a horizontal
  residual demand
• Does not lose all sales if price increases
• Faces downward sloping demand

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Monopoly

• Firm can set price within some reasonable range
  and will still sell goods
• Monopolist is a regular profit maximizing firm
• MR(Q) MC(Q)

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What is Marginal Revenue

• For a perfectly competitive firm
• Marginal Revenue Average Revenue Price
• For the monopolist Price is no longer exogenous.
  Price depends on Q, which is the monopolists
  output choice
• Average Revenue (P(Q)xQ)/Q P(Q)

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Average Revenue is not equal to Marginal Revenue
for the Monopolist!!!!
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Convenient Fact

• If inverse Demand is linear
• P(Q) a bQ
• MR(Q) a 2bQ
• Same intercept as inverse demand
• Twice the slope of the inverse demand
• MR hits Q axis half way
• Can we show this? Yes!!!!
• If MR p, demand is perfectly elastic

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Where does the monopolist produce?
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The Monopoly Decision
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Market Power

• Market Power is the ability of a firm to charge a
  price above marginal cost profitably.
• Degree of market power depends on elasticity of
  demand curve at the profit maximizing quantity.

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Measure of Market Power The Lerner Index

• MR(Q) MC(Q)
• Lerner Index (p- MC)/p
• If firm is profit maximizing
• (p-MC)/p -1/?ed
• Ranges from 0 to 1
• If pMC Lerner Index 0 ? Perfect Competition
• The more elastic the demand curve, the smaller
  the markup a monopolist is able to charge.

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Sources of Market Power

• Demand is inelastic if
• Consumers are willing to pay virtually anything
  for a good
• No close substitutes
• No entry
• Similar firms are far away
• Other firms products are very different.