Monopoly

1
Lecture 20

• Monopoly

2
Market structure

• Market structures
• A monopolized market - a single seller.
• Monopoly affects the price (has market power)
• Takes the price effect into account
• Today choice without disctimination

N 1 2 3-10 10-
Name
pall
3
Monopoly

• What causes monopolies?
• large fixed costs (Natural Monopoly)
• a legal fiat (US Postal Service)
• a patent (a new drug)
• sole ownership of a good ( a toll highway)
• formation of a cartel (OPEC)

4
Profit Maximization

• Secret of happiness (FOC)
• Intuition the last unit gives the same in terms
  of revenue as it costs
• Competitive firm
• Monopoly MR not equal to price

5
Marginal Revenue and Price

• Competitive firm
• Monopoly

6
Profit of a Monopoly

• Profit of the monopoly
• Suppose
• Total Revenue
• Marginal Revenue

7
y maximizing profit

• Secret of happiness (FOC)
• Intuition the last unit gives the same in terms
  of revenue as it costs
• Difference MR not equal to price

8
y maximizing profit geometry

p
y
9
Pareto Efficiency

• Competitive markets efficient
• Is outcome Pareto Efficient when one trader is
  big?
• Loss of efficiency deadweight loss
• Total Potential Surplus
• competitive benchmark
• monopoly

10
Gains to trade

• Gains to trade-Total Potential Surplus (TPS)

11
Competitive Benchmark

• Competitive supply pMC
• Consumers and Producers Surplus

12
Monopoly Deadweight loss

• Monopoly

13
Measurement of market power

• How to measure market power?
• Candidate 1
• Problem
• Candidate 2

14
Regulation of a Natural Monopoly
15
Regulating a Natural Monopoly

• So a natural monopoly cannot be forced to use
  marginal cost pricing. Doing so makes the firm
  exit, destroying both the market and any
  gains-to-trade.
• Regulatory schemes can induce the natural
  monopolist to produce the efficient output level
  without exiting.