Monopolists raise prices above MC by reducing output. This
makes them rich at our expense.
But capitalist firms can only survive with some monopoly power.
Perfectly competitive firms cannot survive.
Monopolies survive by controlling location, talent,
technologies, reputation, or because there are economies to
scale.
3. Just to get it out of the way One version of this game was
invented by a follower of Henry George who believed that the
fundamental problem in America was monopoly over land.
4. Monopolies act knowing that they can sell more only at a
lower price They think about the effect increasing production has
on inframarginal sales. They produce only if marginal revenue is at
least equal to marginal cost, MR=MC. They are smart. You can be
too!
5. Starting with Perfect Competition Equilibrium at A
6. Perfect Competition Maximizes Social Surplus
7. Perfect Competitors lose money because they ignore fixed
costs Equilibrium at A
8. Monopolist produces less, at MR=MC, and sells at higher
price PC Equilibrium at A
9. Monopoly reduces and transfers surplus
10. Comparing Monopoly and Perfect Competition
11. Perfect competitors lose on their last (marginal) sales
Perfect competitors produce at P=MC. There, MR
12. A monopolist is the only seller of its products This
includes companies that are the only sellers of products in their
industry such as a local cable operator. Every company that puts a
name on a product is a monopolist. These include Intel, Microsoft,
Boeing, Antonios Pizza, and Bills Grass. All of these have a
monopoly in their particular products.
13. How monopoly is different from perfect competition
Monopolists produce less.
Monopolists charge more.
Monopolists dont produce where MU>MC; i.e. where we wish
there would be production.
Monopoly allows capitalist firms to survive.
14. If capitalism needs monopoly, why do orthodox economists
emphasize perfect competition? Perfect competition is nicer because
it aligns firm behavior with social benefits. Under PC, firms
produce until MU=MC, maximizing consumer and producer welfare.
Under Monopoly, firms produce less, lowering total welfare
15. Here is how Monopoly changes things They reduce output At
lower output they raise prices Higher prices redistributes consumer
surplus to monopolist Lower output means some lost surplus
16. Sources of monopoly and market power Economies to scale and
high minimum efficient scale A typical factory to build
semi-conductor chips costs $2.5-3.0 billion. Few companies can
invest that much to compete with Intel.
17. Network economies and lock in Competition is limited where
consumers need to consume the same products, or where you are
locked-in to buying a companys products because of past investment.
Microsoft benefits from network economies because consumers want to
talk to each other within Windows-world. Printer and razor
companies are good at lock-in.
18. Location Control a good location and your competition is
DOA. Would you want to own a parking lot next to Fenway Park? They
charge $45 to park during a game.
19. Information and Brand Name How much extra will you pay for
this? Do you feel safer in one of their planes?
20. The strongest monopolies control talent Wed be doomed
without him:
21. Take-away Question Since monopoly is the norm, and even
necessary for a capitalist market economy: why do orthodox
economists largely ignore it to focus on the imaginary, and
illusory, world of perfect competition? Could it be that they just
want to make capitalism look good? She didnt think so. Economist
Rosa Luxemburg
22. Take-away points
Monopolists raise prices above MC by reducing output. They
redistribute income towards themselves and reduce social
welfare.
Without monopoly pricing power, almost all firms would go out
of business.
Monopolies are established by controlling location, talent,
technologies, reputation, or by economies to scale.