Monopoly

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Lecture 19

• Monopoly

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Announcement (Important!)

• On Thursday, April 18th
• L1 (1-215) will be held in 125 Ag Hall
• L2 (230-345 will be held in Ingraham B10
• This is only a one time change.

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Market structure

• Market structures
• A monopolized market - a single seller.
• Monopoly affects the price (has market power)
• Takes the price effect into account
• Today choice without disctimination

N 1 2 3-10 10-
Name
pall
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Monopoly

• What causes monopolies?
• large fixed costs (Natural Monopoly)
• a legal fiat (US Postal Service)
• a patent (a new drug)
• sole ownership of a good ( a toll highway)
• formation of a cartel (OPEC)

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Profit of a Monopoly

• Profit of the monopoly
• Suppose
• Total Revenue
• Marginal Revenue

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y maximizing profit

• Secret of happiness (FOC)
• Intuition the last unit gives the same in terms
  of revenue as it costs
• Difference MR not equal to price

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y maximizing profit geometry

p
y
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Pareto Efficiency

• Competitive markets efficient
• Is outcome Pareto Efficient when one trader is
  big?
• Loss of efficiency deadweight loss
• We start with a competitive model

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Gains to trade

• Gains to trade
• Competitive model pMC
• Consumers and Producers Surplus

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Deadweight loss

• Monopoly

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Measurement of market power

• How to measure market power?
• Candidate 1
• Problem
• Candidate 2

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Elasticity and Markup

• With MR0, elasticity
• Elastic part relevant
• Markup

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Regulation of a Natural Monopoly
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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.