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

3. 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.

4. Welfare Effects of a Monopolist

5. Taxing a Monopolist

6. 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)

7. 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

8. 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*

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

10. Monopolistic Competition

11. Welfare Effects of Monopolistic Competition