Monopoly Vs Competition 1 Monopoly versus competition smaller

Monopoly Vs. Competition 1. Monopoly versus competition (smaller q, higher p) 2. Imposing a tax on a monopolist similar to competition in that producer still bears part of it. 3. Price controls and monopoly. . . a case where controls may increase efficiency. 4. Price discrimination. 5. The tradeoff associated with patents and copyright deadweight loss in consumption versus possible new products. 1

Monopoly charges higher price, produces smaller quantity. Monopoly causes Deadweight Loss 1+2. Area 3+4 is transfer to producer from consumer MC S Pm 4 3 Pc 1 2 D Qm 2 Qc MR

Tax on Monopoly: price goes up by less than tax, so burden of tax is still shared. Monopolist tends to pay bigger share than would competitors. Deadweight loss grows. MC+t P 2 MC P 1 t a x D Q 2 3 Q 1 MR

A Price Control on a monopolist. Since p cannot go above Pcontrol the MR is equal to Pcontrol , output may increase (if price control is not too low, and deadweight loss may decrease. MC P 1 Pcontrol D Q 1 4 MR Q 2

A Price Control on a monopolist. Since p cannot go above Pcontrol the MR is equal to Pcontrol , output may increase (if price control is not too low, and deadweight loss may decrease. MC P 1 Pcontrol D Q 1 5 MR Q 3 Q 2

Perfect Price Discrimination 1. 2. 3. 4. 5. 6. Theoretical ideal. Cannot be fully achieved. Find maximum price that every consumer is willing to pay and charge them that price. Requires more information than any firm has, and the prevention of arbitrage. Demand Curve becomes MR curve. No Deadweight Loss. Approximate examples: automobile dealers, doctors in the old days. 6

Perfect Price Discrimination. P 1 P 3 S P 6 D 7

Price Discrimination 1. 2. 3. 4. 5. If markets for a single product have different MRs, profits can be increased by shifting output from low MR markets to high MR markets. Raise price in low MR market and lower price in high MR market. High MR market is high elasticity market. Need to Prevent Arbitrage. Examples: Airlines with business travelers and vacationers. Coupons. 8

Market 2 Market 1 P 1 price before discrimination P 2 D mr Q 2 Q 1 mr 1 MR MR 9

Price Discrimination Rules 1. 2. 3. 4. Raise price in market with lower elasticity (lower responsiveness) Lower price in market with higher elasticity. Do this until MRs are equalized. But prices will not be equalized. Examples: Airlines with business travelers and vacationers. 10

The Causes of Monopoly 1. Natural Monopoly 2. Government grant (U. S. postal service, electric company), 3. Patents and Copyright. 4. Control of scarce resource. 5. Technical Superiority. 6. Network Effects. 11

Natural Monopoly 1. 2. 3. 4. Downward sloping AC curve. More efficient to have 1 large firm than many small firms. Rate of return regulation is how we regulate these firms. Removes incentive to keep costs down. 12

Natural Monopoly Pm Unregulated Profit Pr Losses with efficient output PE R M D Qm Qr 13 QE MC AC

Patent (copyright) tradeoff 1. 2. 3. 4. With no protection, creators do not reap much of the rewards of their creations. They are given monopoly protection, which increases their revenues, but raises price to consumers. This increases the number of inventions, but decreases the use of each invention? We do not know the optimal tradeoff. 14

Monopsony 1. 2. 3. Single buyer instead of single seller. Price paid is less than competitive level. Quantity purchased is also less. Deadweight loss, similar but inverted compared to monopoly. 15

Monopsony pays lower price, consumes smaller quantity. Deadweight Loss 1+2. Area 5+4 is transfer to consumer from producer. S MFC 3 Pc Pm 8 1 4 6 5 2 7 D Qm Qc 16 MR

Network Effects 1. 2. 3. 4. Increased market size makes product more valuable to consumers. This is just like an economy of scale in that it benefits large firms relative to small ones. Leads to natural monopoly. It implies that demand increases for large networks, and that prices should rise. In Microsoft case, judge decided that they are a barrier to entry. 17