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Chapter 25 59
Chapter 25
Monopoly
This chapter discusses the theory of monopoly and compares it with that of
competition. The big idea here is the inefficiency of monopoly. The first way
to drive it home is to use the fundamental definition of Pareto improvement:
whenever price exceeds marginal cost, there must be a whole set of transactions
that are Pareto improving. The second way is to add up the consumer and
producer surpluses to measure the deadweight loss of monopoly.
The example of an optimal patent life is a nice way to illustrate why society
might want to allow certain kinds of monopolies. I often talk about the current
hot topic of software manufacturers wanting to protect the “look and feel” of
their software.
Monopoly
A. Profit maximization
4. or p(y)[1 + 1/]=c(y)
5. linear case
a) in case of linear demand, p=a−by, marginal revenue is given by
b) see Figure 23.1.
6. constant elasticity, q=Ap
B. Taxes
1. linear case — price goes up by half of tax. Figure 23.3.
2. log case — price goes up by more than tax, since price is a markup on MC
60 Chapter Highlights
C. Inefficiency of monopoly
1. Pareto efficient means no way to make some group better off without
hurting some other group
D. Patents
1. sometimes we want to pay this cost of inefficiency
2. patents: trade-off of innovation against monopoly losses
E. Natural monopoly
1. public utilities (gas, electricity, telephone) are often thought of as natural
monopolies
2. occurs when p=mc is unprofitable — decreasing AC
3. Figure 23.6.
F. Cause of monopoly
1. MES large relative to size of market
