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Intro Monopolist’s PMP Inefficiency Natural Monopoly
Econ 3023 Microeconomic Analysis
Chapter 24: Monopoly
Instructor: Hiroki WatanabeSpring 2013
Watanabe Econ 3023 24 Monopoly 1 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization Problem
3 Inefficiency of Monopoly
4 Natural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 2 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization Problem
3 Inefficiency of Monopoly
4 Natural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 3 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Project 1.1 (Overview of Producer Theory)18 Technology19 Profit Maximization Problem20 Cost Minimization Problem21 Cost Curves22 Firm Supply23 Aggregate Supply24 Monopoly25 Monopoly Behavior26 Oligopoly
Watanabe Econ 3023 24 Monopoly 4 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Closely related to Ch15B Elasticity.A monopolized market has a single seller.The monopolist’s demand curve is not flat (likeperfect competitors) but aggregate demand curveitself.The monopolist can alter the market price byadjusting its output level.
Watanabe Econ 3023 24 Monopoly 5 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Example 1.2 (Coca Cola Faces Downward-SlopingDemand Curve)Take a listen to Marketplace Audio Clip .
So when you have price increases hitting, moreconsumers are going to be looking at thatbottle of Coca-Cola and saying, "Do I reallyneed this?"
How is Coca Cola’s decision different from price taker’s?
Watanabe Econ 3023 24 Monopoly 6 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
0 20 40 60 80 1000
1
2
3
4
5
6
7
8
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
u, P
rice
($)
MC(y)AC(y)Aggregate Demand
0 20 40 60 80 1000
1
2
3
4
5
6
7
8
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
u, P
rice
($)
Watanabe Econ 3023 24 Monopoly 7 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
0 20 40 60 80 1000
1
2
3
4
5
6
7
8
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
u, P
rice
($)
MC(y)AC(y)Aggregate Demand
0 20 40 60 80 1000
1
2
3
4
5
6
7
8
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
u, P
rice
($)
Watanabe Econ 3023 24 Monopoly 8 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Factor Example
Legal fiatPatent
Sole ownership of a resourceLarge economies of scale
Watanabe Econ 3023 24 Monopoly 9 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization ProblemPerfect Competition vs MonopolySolving Monopolist’s PMPMarginal Condition Doesn’t Give PriceExample
3 Inefficiency of Monopoly
4 Natural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 10 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Problem 2.1 (PMP in a Perfectly CompetitiveEnvironment)
maxyπ(y) = py − TC(y).
Problem 2.2 (Monopolist’s PMP)
Watanabe Econ 3023 24 Monopoly 11 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Compare price-taker Jack Example 2.4 in Ch22 tomonopolistic Jack:
Watanabe Econ 3023 24 Monopoly 12 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Example 2.3 (Price-Taker Jack)
Suppose that Jack has the following productionenvironment ( Example 2.4 in Ch22):
y TR(y) TC(y) π(y) MR(y) MC(y) Δπ
0 0 3 -3 - - -1 6 5 1 6 2 42 12 8 4 6 3 33 18 12 6 6 4 24 24 17 7 6 5 15 30 23 7 6 6 06 36 30 6 6 7 -17 42 38 5 6 8 -28 48 47 1 6 9 -3
Watanabe Econ 3023 24 Monopoly 13 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
35
40
45
Tot
al R
even
ue [$
]
Cheesecake y [slices]
TR(y)TC(y)π(y)
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
35
40
45
Tot
al R
even
ue [$
]
Cheesecake y [slices]
Watanabe Econ 3023 24 Monopoly 14 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8−4
−2
0
2
4
6
8
10
Tot
al R
even
ue [$
]
Cheesecake y [slices]
MR(y)MC(y)∆π(y)
0 1 2 3 4 5 6 7 8−4
−2
0
2
4
6
8
10
Tot
al R
even
ue [$
]
Cheesecake y [slices]
Watanabe Econ 3023 24 Monopoly 15 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Example 2.4 (Monopolistic Jack)
Suppose that Jack has the following productionenvironment:
y MWTP(y) TR(y) TC(y) π(y) MR(y) MC(y) Δπ
0 - 3 -3 - - -1 8 5 3 2 62 7 8 6 3 33 6 12 6 4 04 5 17 3 5 -35 4 23 -3 6 -66 3 30 -12 7 -97 2 38 -24 8 -128 1 47 -39 9 -15
Watanabe Econ 3023 24 Monopoly 16 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
TR(y)TC(y)π(y)
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 17 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
MWTP(y)MR(y)MC(y)∆π(y)
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 18 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Comparison between price-taker Jack andmonopolistic Jack.Two oddities with monopolistic Jack (everything elseis the same):
Fact 2.5 (Monopolist’s Revenue)
1 Total revenue TR(y) curls up.
2 Marginal revenue MR(y) is not flat anymore and dropsfaster than MWTP(y).
Watanabe Econ 3023 24 Monopoly 19 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Decode Ê in Fact 2.5 :
Definition 2.6 (Two Counteracting Effect on TotalRevenue)
1 Quantity effect: Sell more, and earn more.
2 Price effect: Sell more, price drops, and earn less.
Watanabe Econ 3023 24 Monopoly 20 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
TR(y)TC(y)π(y)
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 21 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
Decode Ë in Fact 2.5 :Breakdown of marginal revenue:If Jack sells the 2nd slice, price drops from 8 to 7.
1 He will earn $7 from the 2nd slice (same asMWTP(7))
2 but he will lose $1 from the 1st slice (take a dollaroff MWTP(8)).1
MR(y) = MWTP(y)︸ ︷︷ ︸
incremental revenue from an additional slice sold >0
+ΔMWTP(y)
Δyy
︸ ︷︷ ︸additional revenue from existing sales <0
.
2
1See Ch25.2TR′(y) = [MWTP(y)y]′ = MWTP(y) + MWTP′(y)y.
Watanabe Econ 3023 24 Monopoly 22 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Perfect Competition vs Monopoly
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
MWTP(y)MR(y)MC(y)∆π(y)
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 23 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
How does Fact 2.5 affect the way monopolistic Jacksolves Problem 2.2 ?Some are the same as Problem 2.1 , and then there’sa trap.
Watanabe Econ 3023 24 Monopoly 24 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
Fact 2.7 (Monopolistic Pricing)
Monopolistic Jack’s two-step pricing procedure:1 Use marginal condition
MR(y) = MC(y)
to find y∗.
Now ditch MR(y) after you get y∗.
2 (And here’s the trap). Then plug y∗ back inMWTP(y) (NOT MR(y)) to find the price
p = MWTP(y∗).
Watanabe Econ 3023 24 Monopoly 25 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
Two suspicions with Fact 2.7 :
Question 2.8 (Monopolistic Pricing)
1 Why do monopolistic Jack and price-taker Jack share thesame marginal condition:
MR(y) = MC(y)?
2 Price-taker Jack used to have
p = MR(y).
Then shouldn’t monopolistic Jack do the same thing tofind the price rather than setting
p = MWTP(y)?
Watanabe Econ 3023 24 Monopoly 26 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
Answer to Ê in Question 2.8 :TC(y) still runs parallel to TR(y) at y∗.
Watanabe Econ 3023 24 Monopoly 27 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
TR(y)TC(y)π(y)
0 1 2 3 4 5 6 7 8
0
5
10
15
20
25
30
Tot
al R
even
ue, T
otal
Cos
t, P
rofit
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 28 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
MWTP(y)MR(y)MC(y)∆π(y)
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 29 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Solving Monopolist’s PMP
Consider “What if not?” What would
MC(y) < MR(y)
mean?
Watanabe Econ 3023 24 Monopoly 30 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Condition Doesn’t Give Price
Answer to Ë in Question 2.8 :
Watanabe Econ 3023 24 Monopoly 31 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Condition Doesn’t Give Price
In Example 2.4 ,y∗ = 3TC(3) = 12MR(3) = 4MWTP(3) = 6.
If he charges MR(3) and MWTP(3), what would behis profit levels?Total cost is the same. Find the total revenue in thefollowing:
Watanabe Econ 3023 24 Monopoly 32 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Condition Doesn’t Give Price
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
MWTP(y)MR(y)MC(y)∆π(y)
0 1 2 3 4 5 6 7 8−2
−1
0
1
2
3
4
5
6
7
8
MW
TP
, MR
, MC
($)
Cheesecake y (slices)
Watanabe Econ 3023 24 Monopoly 33 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Condition Doesn’t Give Price
Liz is happy to pay MWTP(3) = 6 dollars for the 3rdslice.Then what’s the point of charging MR(3) = 4 dollarsinstead?Conclude: marginal condition is there to find theoptimal quantity y∗. Not the price.
Watanabe Econ 3023 24 Monopoly 34 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Example
Example 2.9 (Monopolist’s PMP)
Suppose monopolistic Jack faces
MWTP(y) = −y + 12
withMR(y) = −2y + 12.
a His marginal cost is
MC(y) = 2y.
What is his optimal production level y∗ and the price p?aI’ll get you MR(y) in the exam. Just know that MR(y) drops faster
than MWTP(y).
Use Fact 2.7 .Watanabe Econ 3023 24 Monopoly 35 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Example
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
MWTP(y)MR(y)MC(y)
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
Watanabe Econ 3023 24 Monopoly 36 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization Problem
3 Inefficiency of MonopolyMonopolistic Pricing Yields Deadweight LossMarginal Cost Pricing Yields Pareto Optimum
4 Natural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 37 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Monopolistic Pricing Yields Deadweight Loss
A word “monopoly” has a derogatory connotationto it.Is it?It is.
Watanabe Econ 3023 24 Monopoly 38 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Monopolistic Pricing Yields Deadweight Loss
Monopolistic Jack maximizes his profit by choosingy∗ from
MR(y) = MC(y)
and set the price at
p∗ = MWTP(y∗).
This result (y∗, p) maximizes Jack’s profit. Notsociety’s.
Watanabe Econ 3023 24 Monopoly 39 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Monopolistic Pricing Yields Deadweight Loss
How do we evaluate (y∗, p)?Is there anything better than (y∗, p)Compute the sum of consumer and producersurplus (called total surplus).If (y∗, p) maximizes total surplus, then allocationthus derived is Pareto optimal. 3
Take Example 2.9 .
3More on this in Ch16, 31.Watanabe Econ 3023 24 Monopoly 40 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Monopolistic Pricing Yields Deadweight Loss
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
MWTP(y)MR(y)MC(y)
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
Watanabe Econ 3023 24 Monopoly 41 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Cost Pricing Yields Pareto Optimum
What if we ask monopolistic Jack to act as if he is ina perfectly competitive market?
Watanabe Econ 3023 24 Monopoly 42 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Cost Pricing Yields Pareto Optimum
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
MWTP(y)MR(y)MC(y)
0 1 2 3 4 5 6 7 8 9 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
Cheesecakes y (slices)
Mar
gina
l Cos
t, M
argi
nal R
even
ue, P
rice
($)
Watanabe Econ 3023 24 Monopoly 43 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Cost Pricing Yields Pareto Optimum
y p PS CS TS DWL
Monopolistic pricing 3 9 18 4.5 22.5 1.5Marginal cost pricing 4 8 16 8 24 0
Difference -2 3.5 1.5
Watanabe Econ 3023 24 Monopoly 44 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Cost Pricing Yields Pareto Optimum
Discussion 3.1 (Conflict with Marginal CostPricing)
1 Why doesn’t monopolistic Jack produce 4cheesecakes?
2 Why is y∗ = 3 not an efficient outcome?
Watanabe Econ 3023 24 Monopoly 45 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Marginal Cost Pricing Yields Pareto Optimum
1 Jack won’t produce the 4th slice because1 MC(4) = 82 MR(4) = 4.
2 y∗ = 3 is not Pareto optimal because1 MC(3) = 62 MWTP(3) = 9.
Watanabe Econ 3023 24 Monopoly 46 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization Problem
3 Inefficiency of Monopoly
4 Natural MonopolyNatural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 47 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
Scale economy is one reason that an industrybecomes monopolistic.Consider an electricity company.
1 Fixed costs: laying cables2 Marginal costs: adding a subscriber
If there are large fixed costs and small marginalcosts with respect to the market size, a phonecompany becomes a natural monopolist.“Natural” because it happens without patentprotection etc.
Watanabe Econ 3023 24 Monopoly 48 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
MWTP(y)MR(y)MC(y)AC(y)
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
Watanabe Econ 3023 24 Monopoly 49 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
A natural monopoly arises when Jack’s technologyhas economies of scale large enough for him tosupply the whole market at a lower average totalproduction cost than is possible with more than onefirm in the market.Because of a large fixed cost, elimination ofdeadweight loss becomes a bit tricky.
Watanabe Econ 3023 24 Monopoly 50 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
If we impose marginal cost pricing, what wouldhappen to Jack’s profit?
Watanabe Econ 3023 24 Monopoly 51 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
MWTP(y)MR(y)MC(y)AC(y)
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
Watanabe Econ 3023 24 Monopoly 52 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
We could get rid of the deadweight loss.But now Jack will exit the market (y = 0).Then the whole total surplus will be gone.That’s even worse than before.
Watanabe Econ 3023 24 Monopoly 53 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
Alternative regulation: average cost pricing.
Watanabe Econ 3023 24 Monopoly 54 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
MWTP(y)MR(y)MC(y)AC(y)
0 18 23 300
9
11.5
15
2022
2527
Cheesecakes y (slices)
MR
, MW
TP
, MC
, AC
($)
Watanabe Econ 3023 24 Monopoly 55 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
y p DWL TR(y) TC(y) π(y)
Laissez-faire 18 27 108 486 450 36Marginal cost pricing 30 15 0 450 600 150Average cost pricing 23 22 36.75 506 506 0
Watanabe Econ 3023 24 Monopoly 56 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
Discussion 4.1 (Average Cost Pricing)
Is average cost pricing implementable? If it is, whatwould be the long-term effect?
Watanabe Econ 3023 24 Monopoly 57 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Natural Monopoly
1 Can a government force average cost pricing?2 What’s the long-term effect?
Watanabe Econ 3023 24 Monopoly 58 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
1 Introduction
2 Monopolist’s Profit Maximization Problem
3 Inefficiency of Monopoly
4 Natural Monopoly
5 Summary
Watanabe Econ 3023 24 Monopoly 59 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Monopolist’s PMP.Inefficiency of monopoly.Possible regulations and associated problems.
Watanabe Econ 3023 24 Monopoly 60 / 61
Intro Monopolist’s PMP Inefficiency Natural Monopoly
Index
average cost pricing, 54,57consumer surplus, 40deadweight loss, 44, 50,53economies of scale, 9legal fiat, 9marginal condition, 25, 34marginal cost, 30marginal cost pricing, 44,51marginal revenue, 19, 22marginal willingness topay, 16MC(y), see marginal costmonopolistic pricing, 25
MWTP(y), see marginalwillingness to paynatural monopoly, 48optimal quantity, 34Pareto optimal, 40patent, 9price effect, 20producer surplus, 40profit maximizationproblem, 11quantity effect, 20total revenue, 13, 16, 19total surplus, 40TR(y), see total revenuey∗, see optimal quantity
Watanabe Econ 3023 24 Monopoly 61 / 61