1 / 13

Understanding Monopoly Behavior and Market Power in Economics

This document outlines the essential characteristics of monopolies as sole suppliers of products with no close substitutes. It discusses key concepts such as demand curves, profit maximization, and the Lerner Index, which reflects a monopolist's ability to set prices above marginal costs. The role of special knowledge, patents, and strategic behavior in creating and maintaining monopolies is examined. Additionally, the document explores the costs and benefits of monopolies, including welfare implications and their relation to positive profits.

basia-cash
Télécharger la présentation

Understanding Monopoly Behavior and Market Power in Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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

More Related