Monopoly

1. Monopoly … sole supplier of a product with no close substitutes. Col. Gutermuth - Health Econ

2. Characteristics • Chooses p or q, but not both. • Faces downward sloping demand. • “A monopolist will never operate in the inelastic portion of the demand curve.” • NOTE: There is NO supply curve for a monopolist !!!! Col. Gutermuth - Health Econ

3. Demand Curve Facing a Monopoly Col. Gutermuth - Health Econ

4. Firm Behavior Col. Gutermuth - Health Econ

5. Profit Maximization Col. Gutermuth - Health Econ

6. “Price Cost Margin” & Lerner Index • (p – MC)/p = -1/ • “Lerner Index” of Market Power (ability to price above marginal cost) • Only depends on  Col. Gutermuth - Health Econ

7. Two Examples • Beer •  = -1.0204 • Lerner Index = .98 • Cocaine •  = -4.86 • Lerner Index = .206 Col. Gutermuth - Health Econ

8. Creating and Maintaining a Monopoly • Special Knowledge:allows production of a new or better product. • Special Knowledge:allows production of same product at a lower cost. • Patents • Other Gov’t Restrictions • Strategic Behavior: • Control essential input • Foreclosure Effect Col. Gutermuth - Health Econ

9. Some “Costs” • DWL • Similar to a tax • “Rent” goes to the monopolist • Rent-Seeking Behavior • “complete dissipation of rent” Col. Gutermuth - Health Econ

10. Some “Benefits” • R & D • New/Better Products • Innovations • Externalities • Reduced pollution • Production of Certain Goods • Expensive pharmaceuticals Col. Gutermuth - Health Econ

11. And finally…………. • Positive Profits  Monopoly • Monopoly  Positive Profits Col. Gutermuth - Health Econ

12. Welfare and Markets • 1st Welfare Theorem: • Any competitive outcome is Pareto Optimal • 2nd Welfare Theorem: • Any P.O. point can be sustainable by a competitive equilibrium Col. Gutermuth - Health Econ

13. Welfare and Markets • But … • Aren’t these the same thing?? • NO! Col. Gutermuth - Health Econ