MonopolyMacroeconomics FoundationAlaleh Mani20111

Market Power Key features:

1. No close substitution(even one is enough)2. Barrier to entry

a. Legal Barrier for legal monopoly

b. Natural Barriers for natural monopoly due to economy of scale

Restrictions Definition Monopoly Market Example

Public franchise Grant of an exclusive right to supply good or services

Firms US postal Services for first class mail

Government License

Control entry Occupation, profession, industry

Medicine, law, dentistry, school teachers

Patent Grant of an exclusive right to supply

inventors

Copyright Grant of an exclusive right to supply

Author ,composer of literary

Due to Economy of Scale firm meets the Demand at lowest cost

MR

MC

Profit Maximizing is too hogh and inefficient

Average cost Pricing

Marginal Cost Pricing make firms incur costs

The efficient regulation Price for MC=D is too low to employ by

firms : Firms ask for a fix cost (telephone

services) plus P of marginal costFirms charge different group of customers

by different prices (lack of information)Two part price (tariff)Taking Subsidy (inefficiency)

Price Setting System Single Price for all customers unless low price group sell to high

price group Price discrimination is to sell different

goods and service with different price

Marginal Revenue, Demand, Elasticity and Total revenue

=P=D

Demand, Marginal Revenue, Elasticity

Monopoly Area

Monopoly Area

The maximum price that Market accept

Price in competition market

Inefficiency in Monopoly

Monopoly Gain

MSB

MSC

Not Social loss but a redistribution from consumer to monopoly producer

Rent Economic Rent:

All surplus like ;consumer surplus, producer surplus, economic profit

Rent Seeking: Capturing economic Rent by:

1. Buying a monopoly at a price less than economic profit, need TIME and EFFORT

Time and effort is another social cost plus DWL caused by monopoly The payment is not cost ,it is a ownership transfer (CFA 2008)

2. Creating a Monopoly= lobbying and political activity to create license to make restriction

Rent Seeking is a competition market since there is no barrier to enter and seek reach to equilibriume

ATC

Break Even

Price Discrimination 1.identifying different buyers Price differences is due to different willingness to pay

not because of different cost.

2.The products can not be resold

The Idea behind PD is taking benefit from consumer surplusTwo ways of applying PD: Among unit of good (exp: bulk has discount) Among groups of buyer (airplane seat)

Efficiency

Price discrimination

Creative monopolist

Monopoly Vs Competition Advantages1.Incentive to innovationthere is competitors to trigger the notions2.Economies o scale and scopePatents, Invention happen in big firms

Disadvantages1. Distribution of surplus is not equal2. Rent seeking is profitable