Monopoly and Market Power I. Market power and market characteristics Examples of monopoly Monopoly and the firm’s demand curve What’s the same about monopoly? Prices, Profits, and Losses “What’s wrong” with monopoly What to do about monopoly?

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. Firm’s demand (market demand) curve is downward sloping.

Monopoly and Market Power I. B. What monopoly is 1. One seller 2. Unique, well-defined product 3. Doesn’t 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

Monopoly and Market Power III. Monopoly and the firm’s demand curve A. One seller, unique product, imply that B. The FIRM’s demand curve is the MARKET DEMAND CURVE C. Marginal revenue = DTR/DQ l. For a monopoly, MR < Price 2. Price, TR, MR, and elasticity

Monopoly and Market Power What’s 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, there’s no supply curve)

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

Monopoly and Market Power “What’s 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”

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. Tolerate—and deregulate!