Economics 2010Economics 2010
Lecture 13”
Monopoly versus competition
MonopolyMonopoly
Comparing monopoly and competition
Rent seeking? Gains from monopoly? Monopoly in action, monopoly
under regulation
Does a monopoly produce the same quantity and charge the same price as firms in perfect competition?
Let’s look at an example.The firms in a perfectly competitive
industry are bought up by a single firm--a monopoly.
What happens to price and quantity?
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Begin with a perfectly competitive industry
The demand curve is D and the supply curve is S
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The industry produces the quantity QC and sells it for the price PC
Now the industry becomes a monopoly
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The supply curve of the competitive industry becomes the marginal cost curve of the monopoly.
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The demand curve of the competitive industry becomes the monopoly’s demand curve
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The monopoly also faces the marginal revenue curve MR
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The monopoly maximizes profit by producing the quantity QM, which it sells for a price of PM.
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Compared to perfectly competitive firms, a single-price monopoly restricts output and charges a higher price
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
But suppose the monopoly can price discriminate
Some items are sold for more than PM
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
But some items might be sold for less than PM
The more perfectly a monopoly price discriminates, the closer its output gets to QC, the competitive output
To summarize: A single-price monopoly restricts output and charges a higher price than the firms in a competitive industry
The more nearly a monopoly can perfectly price discriminate, the closer its output gets to that of a competitive industry, but its prices are higher
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
A single-price monopoly restricts output and charges a higher price so it reduces consumer surplus
The monopolist gets a higher profit than the firm in competition (which would eventually just break even!)
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The monopolist gets a higher profit than the firm in competition
But a monopoly does not recoup all the lost consumer surplus
Some of it is lost and no one gets it.This loss is called deadweight loss
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Deadweight loss is a measure of the allocative inefficiency caused by monopoly
Let’s study this with the aid of a figure
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
See what happens in a competitive industry
(this is the “BIG PICTURE”)
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
As before, the equilibrium price is PC and the equilibrium quantity is QC
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
The green triangle shows consumer surplus
There is also a producer surplus
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus is the amount received by the producer in excess of the opportunity cost of production
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
To find the producer surplus, we first complete the supply curve, which is also the marginal cost curve
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Marginal cost is the opportunity cost of the marginal unit produced.
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus is the area above the marginal cost (supply) curve and below the price line
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus
Now let’s see what happens to these surpluses when a monopoly takes over the industry
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus
Under competition, the supply curve is the MC curve
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus
Then, the monopoly sets MC = MR
MC
MR
The profit maximizing quantity is QM and the price is PM
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus
MC
MR
PM
QM
With the higher price, consumer surplus shrinks
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus shrinks too, but the monopoly gains more profit
Producer surplus
But the gain to the monopoly is less than the loss of consumer surplus
There is a deadweight loss
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Producer surplus
A monopoly always redistributes surplus from consumers to itself
There is always a net gain for the monopoly and a net loss for the consumer
There is always a deadweight lossA waste for everyone!
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
In the special case of a perfectly price-discriminating monopoly, there is no deadweight loss
But there is an even larger redistribution from consumers to the producer
There is no waste: the monopolist takes it all!
Comparing Monopoly and Comparing Monopoly and CompetitionCompetition
Rent SeekingRent Seeking
There are two ways to get rich: Create wealth Transfer wealth
Rent seeking is the activity of searching out opportunities to transfer wealth from others
Seeking monopoly profit is rent-seeking
Rent SeekingRent Seeking
Three ways to try to get rents from monopoly are: Buy a monopoly Collaborate with a monopoly Create a monopoly
Rent SeekingRent Seeking
Buy a monopolyDoes not bring economic profit to the
buyerTransfers economic profit from the
buyer to the creator of the monopoly
Rent SeekingRent Seeking
Buy a monopolyyou can buy a license to operate a taxibuy a pharmacy, buy a concession for a
shop at an airport or at a sports arena, or in campus (at least in Spain)
Rent SeekingRent Seeking
Create a monopoly This form of rent seeking takes two main
forms: Entering politics Seeking the favor of politicians (give them flights
for free, cases of cigars, invite them to go fish with you )
Examples abound: doctors, farmers, broadcasters, magazine producers, … the list is endless
Rent SeekingRent Seeking
When the cost of rent seeking is added to the deadweight loss, the cost of monopoly becomes huge
It equals deadweight loss plus monopoly profit!
Competitive rent-seeking leads to zero profit!
Rent SeekingRent Seeking
Are there any gains from monopoly?Think in dynamic terms! Who
invented Viagra??? Monopoly in action: monopoly under
regulation