Robin Naylor, Department of Economics, Warwick 1 Topic 3 : Lecture 17 Perfect competition and Consumer Surplus X p pcpc D Consumer Surplus is given by? And Producer Surplus? S XcXc

Robin Naylor, Department of Economics, Warwick 2 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: Suppose a monopolist takes over the previously competitive industry. X p pcpc D Consumer Surplus under Monopoly is given by? And Producer Surplus under Monopoly? S XcXc MC AC The Monopolist faces the Market Demand Curve. We assume that the Monopolist’s Cost Curves are simply the sum of those of the individual competitive firms.

Robin Naylor, Department of Economics, Warwick 3 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: Suppose a monopolist takes over the previously competitive industry. X p pcpc D Consumer Surplus under Monopoly is given by? And Producer Surplus under Monopoly? S XcXc MC AC MR pmpm XmXm

Robin Naylor, Department of Economics, Warwick 4 Topic 3 Lecture 17 Monopoly welfare loss: recap –A monopoly firm takes over. The Market Demand is now the same as that for the individual firm: how much will it produce? Price? D MR LAC LMC Identify: p, X, CS, PS under monopoly. Compare PS and CS under Monopoly and under Perfect Competition. p X S

Robin Naylor, Department of Economics, Warwick 5 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: An alternative representation of the Deadweight Loss of Monopoly (see also B&B p. 469): X p pcpc D = MB S XcXc MC AC MR pmpm XmXm

Robin Naylor, Department of Economics, Warwick 6 Topic 3 Lecture 17 Algebra of monopoly (this is essentially the same analysis as that of Lecture 12 Slide 13)

Robin Naylor, Department of Economics, Warwick 7 Topic 3 Lecture 17 Monopolistic competition –Like Perfect Competition, there are many firms –Unlike Perfect Competition, each faces a downward-sloping demand curve (why?) –Industry equilibrium is when each just breaks even: LMC LAC D MR X p Here the industry is not in equilibrium: Why not? What happens next?

Robin Naylor, Department of Economics, Warwick 8 Topic 3 Lecture 17 Monopolistic competition –Like Perfect Competition, there are many firms –Unlike Perfect Competition, each faces a downward-sloping demand curve (why?) –Industry equilibrium is when each just breaks even: LMC LAC D MR X p Here the industry is in equilibrium: Why?

Robin Naylor, Department of Economics, Warwick 9 Topic 3 Lecture 17 Oligopoly –Few firms (in our models, we’ll typically assume 2 for simplicity) –Interdependent (Why?) –Various possible behaviours Collusive Cournot (quantity) Competition

Robin Naylor, Department of Economics, Warwick 10 Topic 3 Lecture 17 Collusive Oligopoly –Here the firms simply act as if they were a single monopolist –They determine profit-maximising output and each produce, say, half of that output. The price is the monopoly price and the welfare loss, compared to perfect competition, is the monopoly welfare loss. –Example: if p=a – bX and MC=AC=c, then each firm produces: –So total output is (a – c)/2b, the same as under monopoly. –It is not then difficult to work out market price, supernormal profits, Consumer Surplus, and Welfare (Loss) –Note, under Perfect Competition, output is (a – c)/b. (Because c=p=a – bX)

Robin Naylor, Department of Economics, Warwick 11 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 12 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 13 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 14 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 15 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 16 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick 17 Topic 3 Lecture 17 Oligopoly with Cournot Competition

Robin Naylor, Department of Economics, Warwick Topic 3: Lecture Now read B&B 4 th Ed., pp , , , , You might also consult: Frank, Chapters Estrin, Laidler and Dietrich, Chapters 11-13, 15, 16