Microeconomics

Leeds, von Allmen and Schiming

Chapter 10, Monopoly

1. Defining the market, again

   1. Geography

   2. Product characteristics

   3. Time

2. Market Power and Barriers to entry

   1. Five sources of Market Power

      1. Strategic

         1. Control over inputs

         2. Patents and copyrights

      2. Exogenous

         1. Gov't franchises or licenses

         2. Economies of scale - natural monopoly

         3. Network economies

3. Natural Monopoly

   1. High fixed cost

      1. R&D

      2. Physical plant

      3. Distribution network

   2. Low marginal cost

4. Monopoly's Demand and Marginal Revenue

   1. MR has same intercept as demand

   2. MR falls twice as fast as demand

5. Short run profit maximization

   1. MR = MC ==> optimal output Q*

   2. Monopolists price found from D(Q*)

   3. P>MR

6. Efficiency effects of monopoly

   1. Monopoly is socially inefficient

   2. Efficiency occurs where MC crosses the demand curve

   3. Consumer surplus

   4. Producer surplus

   5. Deadweight loss

7. Government response to monopoly

   1. State ownership

   2. Exclusive contracting

   3. Price regulation

      1. U-shaped AC

      2. Natural monopoly and the 2-part tarif

8. Price discrimination

   1. 1st degree

      1. No efficiency loss

      2. Income distribution effect

   2. 2nd degree

   3. 3rd degree

   4. Price hurdle as a mechanism for price discrimination

      1. Increased consumer surplus

      2. Increased producer surplus