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Economics 2010 Lecture 13” Monopoly versus competition Monopoly Comparing monopoly and competition Rent seeking ? Gains from monopoly ? Monopoly in action, monopoly under regulation Comparing Monopoly and Competition 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 Competition Begin with a perfectly competitive industry The demand curve is D and the supply curve is S Comparing Monopoly and Competition The industry produces the quantity QC and sells it for the price PC Now the industry becomes a monopoly Comparing Monopoly and Competition The supply curve of the competitive industry becomes the marginal cost curve of the monopoly. Comparing Monopoly and Competition The demand curve of the competitive industry becomes the monopoly’s demand curve Comparing Monopoly and Competition The monopoly also faces the marginal revenue curve MR Comparing Monopoly and Competition The monopoly maximizes profit by producing the quantity QM, which it sells for a price of PM. Comparing Monopoly and Competition Compared to perfectly competitive firms, a singleprice monopoly restricts output and charges a higher price Comparing Monopoly and Competition But suppose the monopoly can price discriminate Some items are sold for more than PM Comparing Monopoly and Competition 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 Comparing Monopoly and Competition 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 Competition 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 Competition 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 Competition 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 Competition See what happens in a competitive industry (this is the “BIG PICTURE”) Comparing Monopoly and Competition As before, the equilibrium price is PC and the equilibrium quantity is QC Comparing Monopoly and Competition The green triangle shows consumer surplus There is also a producer surplus Comparing Monopoly and Competition Producer surplus is the amount received by the producer in excess of the opportunity cost of production Comparing Monopoly and Competition To find the producer surplus, we first complete the supply curve, which is also the marginal cost curve Comparing Monopoly and Competition Marginal cost is the opportunity cost of the marginal unit produced. Comparing Monopoly and Competition Producer surplus is the area above the marginal cost (supply) curve and below the price line Producer surplus Comparing Monopoly and Competition Now let’s see what happens to these surpluses when a monopoly takes over the industry Producer surplus Comparing Monopoly and Competition Under competition, the supply curve is the MC curve the monopoly sets MC = MR MC Then, Producer surplus MR Comparing Monopoly and Competition The profit maximizing quantity is QM and the price is PM MC PM Producer surplus MR QM Comparing Monopoly and Competition With the higher price, consumer surplus shrinks Producer surplus shrinks too, but the monopoly gains more profit Producer surplus Comparing Monopoly and Competition But the gain to the monopoly is less than the loss of consumer surplus There is a deadweight loss Producer surplus Comparing Monopoly and Competition 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 loss A waste for everyone! Comparing Monopoly and Competition In the special case of a perfectly pricediscriminating 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! Rent 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 Seeking Three ways to try to get rents from monopoly are: Buy a monopoly Collaborate with a monopoly Create a monopoly Rent Seeking Buy a monopoly Does not bring economic profit to the buyer Transfers economic profit from the buyer to the creator of the monopoly Rent Seeking Buy a monopoly you can buy a license to operate a taxi buy a pharmacy, buy a concession for a shop at an airport or at a sports arena, or in campus (at least in Spain) Rent 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 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 Seeking Are there any gains from monopoly? Think in dynamic terms! Who invented Viagra??? Monopoly in action: monopoly under regulation
