Transcript L20
Lecture 20 Monopoly Market structure Market structures: N 1 2 3-10 10-… Name A pall monopolized market - a single seller. Monopoly affects the price (has market power) p( y) 10 y Takes the price effect into account Today: choice without disctimination Monopoly 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) Profit Maximization Secret of happiness (FOC): ( y) TR( y) TC ( y) Intuition: the last unit gives the same in terms of revenue as it costs Competitive firm Monopoly: MR not equal to price Marginal Revenue and Price Competitive firm Monopoly p ( y ) 10 y Profit of a Monopoly Profit of the monopoly ( y) p( y) y TC ( y) Suppose Total p ( y ) 10 y Revenue Marginal Revenue y maximizing profit Secret of happiness (FOC): ( y) TR( y) TC ( y) Intuition: the last unit gives the same in terms of revenue as it costs Difference: MR not equal to price y maximizing profit: geometry p ( y ) 10 y TC ( y ) 0.5 y MC ( y) MR( y) p p * y * y 2 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 Gains to trade p ( y ) 10 y TC ( y ) 0.5 y 2 Gains to trade-Total Potential Surplus (TPS) Competitive Benchmark p ( y ) 10 y TC ( y ) 0.5 y Competitive supply: p=MC Consumer’s and Producers Surplus 2 Monopoly: Deadweight loss p ( y ) 10 y Monopoly TC ( y ) 0.5 y 2 Measurement of market power How to measure market power? p ( y ) 10 y Candidate 1: Problem: Candidate 2: y ( p ) 10 p Regulation of a Natural Monopoly p( y) 10 y TC ( y) 1 y 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.