1. Lecture 20
Monopoly

2. 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

3. 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)

4. Profit Maximization Total revenue Competitive firms (price takers)
Monopoly
Profit
Secret of happiness (FOC):
Difference: MR

5. Marginal Revenue and Price
Competitive firm
Monopoly

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

7. y maximizing profit Secret of happiness (FOC):
Intuition: the last unit gives the same in terms of revenue as it costs
Difference: MR below price

8. y maximizing profit: geometry

9. Quiz
Q: Output and price of a monopoly is A) B) C) D)

10. 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

11. Total Potential Surplus (Gains-to-Trade)

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

13. Monopoly: Deadweight loss

14. Regulation of a Natural Monopoly

15. 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.