Transcript Monopoly Efficiency (day 3)

Monopoly & Efficiency
Deadweight Loss Analysis
Efficiency Analysis
• Allocative Efficiency is when P = MC
– No DWL, socially optimal
– Monopolies fail as P > MC
Competitive Firms always pass P = MC
• Production Efficiency is when
P = min. of ATC
– Monopolies fail as P > min of ATC
– Competitive Firms achieve it only in long run
Monopoly
Perfect Competition
P > MC
Costs and
Revenue
Price
P = MC
MC
(always)
B
Monopoly
price
ATC
P = min of ATC
P > min of ATC
Average total cost
(long run)
A
P1
Demand
Marginal
cost
Marginal revenue
0
Quantity
0
Q
QMAX
Q
Quantity
Deadweight Loss
• Deadweight loss is caused by a monopoly, a tax or subsidy and
an effective price floor/ceiling
– Unless the tax/subsidy is correcting a market failure!
• There is never a deadweight loss when P = MC
(MB = MC)
– if P > MC => market is too small
• Example: misplaced tax or monopoly (or price ceiling…)
– if P < MC => market is too big
• Example: misplaced subsidy
Identical Market Demand Curve
• The market demand curve for a good/service is exactly the same whether an
industry is a monopoly or a competitive industry.
• Therefore the market demand curve below for T-Shirts could be for a monopoly or a
competitive industry
1 Firm
In a competitive industry
market demand = MR
Monopoly:
market demand > MR
Market
Inefficiency of Monopoly
Price
MC
DWL
Monopoly
price
Competitive
EM
P > MC
Allocative Efficiency
P = MC
EC
For competitive industry
P = D= MR
Market demand is MR
So @ Ec MR = MC
Price
D=
Market Demand Curve
MR
0
Monopoly Competitive
quantity
quantity
Quantity
Deadweight Loss Analysis
• Revenue from a tax is transferred from producer/consumer => to Government
• Revenue from a subsidy is transferred from Gov’t => to producer/consumer
• Monopoly excess profit is a transfer of consumer surplus => to private firm
Excess profit => some consumer
surplus turns into monopoly profit
Costs and
Revenue
Monopoly Price
as P > MC
Marginal
cost
0
Q
------------------------
------------------------------------PC
---------------------------
Competitive Price
Deadweight Loss
PM
QM
Q
Q
C
Average total cost
Demand
Marginal revenue
Quantity
Collusion & Cartels
• Collusion
– An agreement among firms about Qty to produce or price to charge
– Antitrust laws prohibit this behavior in USA
• Cartel
– A group of firms acting in unison
– Example: OPEC, DeBeers
OPEC Meeting
How to become a price setter
DeBeers Video
• http://www.youtube.com/watch?v=uRGp0x
8ZE8w
DeBeers Video Analysis
Demand
D1
Supply
Graphing Supply & Demand
S2
S1
----------
P1 --------------- E1
D1
---------------------------
P2 ------------------ E2
S1
P1 --------------- E1
Q1
D1
D2
Q1 Q2
• Demand is kept artificially high & inelastic through advertising
• Supply is kept artificially low by DeBeers
• End Result: Higher prices paid & larger quantity sold