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notes_monopoly - -Rent seeking 5 Monopoly Power The profit...

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Monopoly. 1. Barriers to entry. Decreasing average costs (natural monopoly). Exclusive control of a natural resource. Cartels Patents and copyrights. Exclusive franchises and licenses.
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2. Inverse Demand Function and Marginal Revenue. Inverse demand function : P ( Q ). Monopoly revenue : R ( Q ) = P ( Q ) · Q. Average revenue : R ( Q ) /Q = P ( Q ). Marginal revenue : MR ( Q ) = dR ( Q ) dQ = P ( Q ) + dP ( Q ) dQ · Q, or, in discrete terms, MR ( Q ) = Δ R ( Q ) Δ Q = P ( Q ) + Δ P ( Q ) Δ Q · Q.
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3. Monopoly Equilibrium. Profit maximization conditions : * Q is profit maximizing if MR ( * Q ) = MC ( * Q ) . slope [ MC ( * Q )] > slope [ MR ( * Q )] . P ( * Q ) AC ( * Q ) . 4. Monopoly Distortion of Resource Alloca- tion. Perfect Competition: P ( * Q ) = MC ( * Q ). Monopoly: P ( * Q ) > MC ( * Q ). Monopoly restricts quantity below and raises price above the efficient levels. May also lead to higher costs. - Less pressure
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Unformatted text preview: -Rent seeking. 5. Monopoly Power. The profit maximization condition, MR ( * Q ) = MC ( * Q ), can be re-written (with some manipulation) as P ( * Q )-MC ( * Q ) P ( * Q ) =-1 E D ( * Q ) , ( L ) where E D ( * Q ) is the market price elas-ticity of demand. The left-hand side of (L) is a propor-tional mark-up factor, known as the Lerner index of monopoly power. 6. Corrective Policies. • Anti-trust law. • Regulation of natural monopoly. Objective: P = MC. Problems: Measurement difficulty. Increasing returns to scale and P = MC imply negative profit. Possible resolutions: Subsidy. Two-part tariff....
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