Transcript Perfect Competition and Monopoly

Monopoly: Price Searcher
• Monopoly defined
– One firm
– Unique product, no close substitutes
– Barriers to entry
Barriers to Entry
• Government franchise
• Economies of scale
• Ownership of vital resource
Short-Run Equilibrium in
Monopoly
• Monopoly demand curve
– Revenue considerations
– Cost considerations
• Monopoly equilibrium
Evaluation of Monopoly
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Wealth transfers from consumer to producer
Positive economic profit in LR
P>MC, price not a good cost signal
Restricted output
DWL to society
Rent seeking behavior
Lack incentives for innovation and
efficiency
Multi-Plant Monopoly
• Single firm, operating multiple plants with
different cost structures
• Graphical example
• Mathematical example
Natural Monopoly
• Decreasing cost industry
– Distributional economies
– Economies of scale
• Solutions to problems
– Franchise or nationalize
– Regulate
Price Discrimination
• Block pricing
• Peak load pricing
• Case study: College tuition
Comparing Monopoly with
Perfect Competition
• Social cost of monopoly
– Graphically
– Algebraically