1. Lecture 20 Monopoly

2. Market structure Market structures: u A monopolized market - a single seller. u Monopoly affects the price (has market power) u Takes the price effect into account u Today: choice without disctimination pall N123-1010-… Name

3. Monopoly u What causes monopolies? 1.large fixed costs (Natural Monopoly) 2.a legal fiat (US Postal Service) 3.a patent (a new drug) 4.sole ownership of a good ( a toll highway) 5.formation of a cartel (OPEC)

4. Profit Maximization u Secret of happiness (FOC): u Intuition: the last unit gives the same in terms of revenue as it costs u Competitive firm u Monopoly: MR not equal to price

5. Marginal Revenue and Price u Competitive firm u Monopoly

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

7. y maximizing profit u Secret of happiness (FOC): u Intuition: the last unit gives the same in terms of revenue as it costs u Difference: MR not equal to price

8. y maximizing profit: geometry p y

9. Pareto Efficiency u Competitive markets efficient u Is outcome Pareto Efficient when one “trader” is big? u Loss of efficiency – deadweight loss u Total Potential Surplus –competitive benchmark –monopoly

10. Gains to trade u Gains to trade-Total Potential Surplus (TPS)

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

12. Monopoly: Deadweight loss u Monopoly

13. u How to measure market power? u Candidate 1: u Problem: u Candidate 2: Measurement of market power

14. Regulation of a Natural Monopoly

15. Regulating a Natural Monopoly u 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. u Regulatory schemes can induce the natural monopolist to produce the efficient output level without exiting.