Monopoly vs Perfect Competition

Allocative efficiency Society can maximize its net benefit by allocating just enough resources to produce the quantity where MB = MC, or Q* s

Assumptions Costs are the same for a monopolist (one large firm) and perfect competition (many small firms). Demand is the same for both monopoly and perfect competition.

Compare each to Q* s

Deadweight loss? Q* s is where MB and MC intersect For monopoly, the firm’s profit- maximizing output (Q* m ) is less than Q* s, resulting in a deadweight loss to society. Show the DWL. For perfect competition, the market equilibrium (Q e ) is at Q* s, so it is allocatively efficient with no deadweight loss to society.

Monopoly even worse Its costs are higher than shown, resulting in wasted resources and even less quantity. Rent-seeking costs X-inefficiency Political power Delay innovations

Rent-seeking costs The firm spends money to maintain its monopoly by lobbying the government and hiring lawyers to sue potential competitors. Consumers pay higher prices to cover the cost of keeping the monopoly so we can pay higher prices!

X-inefficiency A monopoly is under less competitive pressure to keep costs as low as possible. They can afford to take it easy, even if it means higher costs and less profit. They will not go out of business.

Political power The high profits earned by a successful monopolists can be used to obtain political power and control government decisions on all issues.

Delay innovation A monopoly will delay innovations until investments in the old product are paid off. Why spend money to make new products when you will just take customers away from your own older products?

Monopoly better? Lower cost of production than shown due to economies of scale. The possibility of becoming a monopoly motivates other firms to innovate. Monopolies innovate to prevent entry. Monopolies may produce more and charge less to avoid entry and government action.