slides_monopoly - 1 Monopoly There is only one rm in the...

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1 Monopoly price). Let demand curve be P ( Q ) , P 0 < 0 . ( Q ) = R ( Q ) ± C ( Q ) = P ( Q ) Q ± C ( Q )
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What is the increase in revenue from increasing Q by dQ ? MR ( Q ) = d ( P ( Q ) Q ) dQ = P ( Q ) + Q dP dQ = f 1 + QdP PdQ g P = f 1 + 1 " D g P < P So you know that monopolist will not produce at inelastic portion of demand curve. We can plot MR ( Q ) as a function of Q . Note that MR ( Q ) < P ( Q ) . Marginal revenue can be nega- tive. Monopolist wants to solve max Q ( Q ) = P ( Q ) Q ± C ( Q )
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At the optimum monopolist will choose Q m such that, MR ( Q m ) = MC ( Q m ) Since MR ( Q ) < P ( Q ) , know MC ( Q m ) < P ( Q m ) . So we already know that there is a deadweight loss to monopoly. Why? marginal social cost of produc- tion is MC ( Q m ) which is less that P ( Q m ) which is what the marginal consumer is willing to pay for that unit. How does monopoly output compare with competi- tive output? Look at the special case where MC ( Q ) = c for C ( Q ) = cQ . Then P ( Q ± ) = c in competitive case (where we sum up supply of all competitive &rms).
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But monopolist will produce MR ( Q m ) = c f 1 + 1 " D g P = c P ( Q m ) > c P ( Q m ) < P ( Q ± ) . Deadweight loss under monopoly. We know that competitive output level is e¢ cient. With monoploy, less consumer surplus but more pro- ducer surplus. The di/erence is the deadweight loss due to to monopoly.
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How much monopoly is there? There are usually two forms of monopolies. 1) Government sanction monopolies. 2) Natural monopolies. Natural monopolies are industries with declining av- output and drive competitiors out. How many natural monopolies are there? Post of- The market test for a natural monopoly is that it It turns out that there are few natural monopolies &rst class mail.
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Is Microsoft windows a natural monopoly? If the government develop software, how many consumers will use it? But what about open source software such as linux? Linux can get users but its free. So can a private software company charge a positive price for operat- ing system and compete with Microsoft? The standard argument for government intervention is that, we have natural monopolies. It is e¢ cient other &rms from entering. In return, the govern- ment will regulate price which almost always does not work. There are two reasons: Firm has much more information than the govt. Second, its easy to bribe the government. What about patents? Patents and copyrights cre-
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slides_monopoly - 1 Monopoly There is only one rm in the...

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