Lecture XXIII: Monopoly/Monopolistic Competition IAS106 Intermediate Microeconomic Theory Maximilian Auffhammer

Sources of Market Power Demand is inelastic if: Consumers are willing to pay virtually anything for a good No close substitutes No entry Similar firms are far away Other firms products are very different.

Welfare Effects of a Monopolist

Taxing a Monopolist

Where do Monopolies come from? Cost Advantages Monopolist controls a key input Superior knowledge in production or distribution Substantial Economies of Scale (Natural Monopoly: One firm can produce market output at a lower cost than several firms)

Where do Monopolies come from? Government Created Monopolies Barriers to entry Licensing Grant Right to be a monopoly Auctioning right to be a monopoly Patents

Regulating Monopolies Outlaw Monopolies (Antitrust Laws prohibit monopolization and price fixing) Regulations preventing existing monopolies from exercising monopoly power Set price at p* and q*

Monopolistic Competition Market Structure: Free Entry and Exit Many Firms Differentiated Product Degree of market power depends on degree of product differentiation

Monopolistic Competition

Welfare Effects of Monopolistic Competition