Monopoly and Market Power

1
Monopoly and Market Power

• I. Market power and market characteristics
• Examples of monopoly
• Monopoly and the firms demand curve
• Whats the same about monopoly?
• Prices, Profits, and Losses
• Whats wrong with monopoly
• What to do about monopoly?

2
Monopoly and Market Power

• Market power and market characteristics
• A. Price taking vs. market power
• B. Market power
• 1. Firm has ability to set its price,
• 2. Output has an effect on price, and
• 3. Firms demand (market demand) curve
  is downward sloping.

3
Monopoly and Market Power

• I. B. What monopoly is
• 1. One seller
• 2. Unique, well-defined product
• 3. Doesnt have (or interact with)
  substitutes
• 4. Barriers to entry
• C. Elements of market structure
• 1. Number of sellers
• 2. Product characteristics
• 3. Degree of competitive interaction
• 4. Condition of entry

4
Monopoly and Market Power

• III. Monopoly and the firms demand curve
• A. One seller, unique product, imply that
• B. The FIRMs demand curve is the
• MARKET DEMAND CURVE
• C. Marginal revenue DTR/DQ
• l. For a monopoly, MR lt Price
• 2. Price, TR, MR, and elasticity

5
Monopoly and Market Power

• Whats the same about monopoly?
• A. Cost-output relations have the same
• form, and curves have the same shapes.
• B. Profits are maximized at the output
• where MR MC.
• (But this time, theres no supply
  curve)

6
Monopoly and Market Power

• Prices, profits, and losses
• A. Marginal Cost
  
• (1
  1/EP)
• B. Short run profits or losses
• C. Long run profits or breakeven

7
Monopoly and Market Power

• Whats wrong with monopoly
• A. Restricted output and misallocation
• B. What about profiteering?
• 1. Profits are possible in the long
  run, but
• 2. Profits as income transfer unfair?
• 3. Profits as partly functionless
• 4. Profits and waste rent seeking

8
Monopoly and Market Power

• What to do about monopoly? Possibilities
• A. Prevention and breakup maybe
• B. P MC regulation losses?
• C. P ATC regulation
• D. Traditional utility regulation
• 1. Revenue requirement
• 2. Fair return on a rate base
• E. Tolerateand deregulate!