econ monopoly notes

Monopoly
1. based on industry tech attributes
⁃ natural - declining lr ac over relevant mkt demand
⁃ network effects, D side
2. govt protect
⁃ usps
⁃ europe and others support and protect some , us not normally
3. cartel

12.5
p=80-.0008Q for all shops in area = inverse D
MR=80-.0016Q
MC=avc=20 (for all shops)
AC minimixing output per shop is 750 haircuts
a ) profit π maxing p, q?
competitive mkt p&Q?

MR=MC
80-.0016Q=20
Q*=37500 p=80-.0008(37500)
P*=$50


p=mc : 80-.0008Q=20
avc=mc
P*=$20
Q*=75000 (LR equil)

less TC=20*37500
profits=11250000 per week

this is lr equil calvin will operate all barbershops of min efficient scale 750 haircuts per week 37500 haircuts/750 = 50 shops


social loss for monopilization :
(75000-37500)*(50-20)*1/2 = 562500 deadweight loss

loss of consumer surplus = 37500 * (50-20) = 1250000
avc=mc


b)econ monopoly π
TR=


inverse demand
p=85-.5Q (q in thousands)
MR= 85-Q
MC=avc=10 sngle p, q where mr=mc
p*=47.5 Q*=75000
π maxing
π contribution = 47.5 - 10 * 75 = 2812.5000
consumer surplus
(85-47.5)*75*1/2 = 1406.3000
avc=mc whats deadweight monopoly loss
150-75 * 37.5 * 1/2 = 1406.3000

conclusions on basica monopoly model

compared to competitive mkt outcomes, price is higher and output is lower
there is a deadweight monopoly loss
surplus is transferred from consumers to producers

possible econ benefits of monopoly
- realization of econ of scale in some markets - natural monopoly
incentive for innovation
- use of patent law to encourage innovation - provides limited time to reap monopoloy rewards


'
ticketmaster
provides online servie
why havent others invaded the market?

monopoly by cartelization - how easy
when several producers are in a mkt and control most of the ourput
they have a big incentive to toe the line and ct as if they were one
- prior example, econ π are 1406300 greater if firms can restrict output to 75000
- so big incentive to collude - cooperate
- but another incentive to cheat some





ways to manage monopoly
price regulation (fig 12.4)
by setting a max price regulatory can limit monopoly π and expanding outputs
how is this really done?
- generally by regulators setting a required rate of return - sufficient to provive a normal π and adding this to costs
- often highly contentious process
- set the rate to low and you get underinvestment
- set rate to hi and you get gold plating


us antitrust policy is key tool
involves several laws
sherman act
clayton act
ftc act

ideas motivating :
- break apart monopolies
- alter behavior in others - stop price fixing