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Lecture 19 Monopoly.

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1 Lecture 19 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 of a Monopoly Profit of the monopoly Suppose Total Revenue
Marginal Revenue

5 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

6 y maximizing profit: geometry

7 Pareto Efficiency Competitive markets efficient
Is outcome Pareto Efficient when one “trader” is big? Loss of efficiency – deadweight loss We start with a competitive model

8 Gains to trade Gains to trade Competitive model: p=MC
Consumer’s and Producers Surplus

9 Deadweight loss Monopoly

10 Measurement of market power
How to measure market power? Candidate 1: Problem: Candidate 2:

11 Elasticity and Markup With MR=0, elasticity= Elastic part relevant

12 Regulation of a Natural Monopoly

13 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.

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