lecture 20 monopoly. market structure market structures: u a monopolized market - a single seller. u...
TRANSCRIPT
Lecture 20
Monopoly
Market structureMarket structures:
A monopolized market - a single seller. Monopoly affects the price (has market power)
Takes the price effect into account Today: choice without disctimination
pall
N 1 2 3-10 10-…
Name
yyp 1 0)(
Monopoly
What causes monopolies?
1. large fixed costs (Natural Monopoly)
2. a legal fiat (US Postal Service)
3. a patent (a new drug)
4. sole ownership of a good ( a toll highway)
5. formation of a cartel (OPEC)
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
( ) ( ) ( )y T R y TC y
Marginal Revenue and Price Competitive firm
Monopoly ( ) 1 0p y y
Profit of a Monopoly Profit of the monopoly
Suppose Total Revenue Marginal Revenue
( ) ( ) ( )y p y y T C y
( ) 1 0p y y
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
( ) ( ) ( )y T R y TC y
y maximizing profit: geometry
( ) 1 0p y y 2( ) 0 .5TC y y( )MC y ( )MR y
p
y
*
*
p
y
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
Gains to trade
( ) 1 0p y y 2( ) 0 .5TC y y Gains to trade-Total Potential Surplus (TPS)
Competitive Benchmark
( ) 1 0p y y 2( ) 0 .5TC y y Competitive supply: p=MC Consumer’s and Producers Surplus
Monopoly: Deadweight loss
( ) 1 0p y y 2( ) 0 .5TC y y Monopoly
How to measure market power?
Candidate 1: Problem: Candidate 2:
Measurement of market power
( ) 1 0p y y
( ) 1 0y p p
Regulation of a Natural Monopoly( ) 1TC y y ( ) 1 0p y y
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.