Transcript Monopoly and Market Power

Monopoly and Market Power
I. Market power and market characteristics
II. Examples of monopoly
III. Monopoly and the firm’s demand curve
IV. What’s the same about monopoly?
V. Prices, Profits, and Losses
VI. “What’s wrong” with monopoly
VII. What to do about monopoly?
Monopoly and Market Power
I.
Market power and market characteristics
A. Price taking vs. market power
B. Market power
1. Firm has ability to set its price,
2. Output has an effect on price, and
3. Firm’s demand (market demand)
curve is downward sloping.
Monopoly and Market Power
I. B. What monopoly is
1. One seller
2. Unique, well-defined product
3. Doesn’t have (or interact with) substitutes
4. Barriers to entry
C. Elements of market structure
1. Number of sellers
2. Product characteristics
3. Degree of competitive interaction
4. Condition of entry
Monopoly and Market Power
III. Monopoly and the firm’s demand curve
A. One seller, unique product, imply that
B. The FIRM’s demand curve is the
MARKET DEMAND CURVE
C. Marginal revenue = DTR/DQ
l. For a monopoly, MR < Price
2. Price, TR, MR, and elasticity
Monopoly and Market Power
IV. What’s the same about monopoly?
A. Cost-output relations have the same
form, and curves have the same shapes.
B. Profits are maximized at the output
where MR = MC.
(But this time, there’s no supply curve)
Monopoly and Market Power
V.
Prices, profits, and losses
A.
Marginal Cost
(1 + 1/EP)
B. Short run: profits or losses
C. Long run: profits or breakeven
Monopoly and Market Power
VI. “What’s wrong” with monopoly
A. Restricted output and misallocation
B. What about “profiteering?”
1. Profits are possible in the long run, but
2. Profits as income transfer: “unfair?”
3. Profits as partly functionless
4. Profits and waste: “rent seeking”
Monopoly and Market Power
VII. What to do about monopoly? Possibilities
A. Prevention and breakup: maybe
B. P = MC regulation: losses?
C. P = ATC regulation
D. Traditional utility regulation
1. “Revenue requirement”
2. “Fair return” on a “rate base”
E. Tolerate—and deregulate!