Lecture 20 Monopoly.

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Presentation transcript:

Lecture 20 Monopoly

Market structure pall 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

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)

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

Marginal Revenue and Price Competitive firm Monopoly

Profit of a Monopoly Profit of the monopoly Suppose Total Revenue Marginal Revenue

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 maximizing profit: geometry

Quiz 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

Total Potential Surplus Total Potential Surplus =Gains to trade

Competitive Benchmark Competitive supply: p=MC Consumer’s and Producers Surplus

Monopoly: Deadweight loss

Regulation of a Natural Monopoly

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.