Lectures_1-2_monopoly

Microeconomics, Lectures 1-2

Monopoly

Elena Paltseva

HSE, Perm

December 9, 2013

1

Introduction

I Teacher: Elena Paltseva, elena.paltseva@nes.ru

IWorks at SITE, Stockholm School of Economics, visiting professor at NES, Moscow

IInterests: applied microeconomics, political economy, industrial organization etc.

IO¢ ce hours: by appointment

I Course: part of your Microeconomics: Theory of Oligopoly

I6 lectures, exercise classes in January

Iwe will cover

Imonopoly and monopolistic price discrimination

Ibasics of game theory

Ioligopolies: Cournot, Bertrand, Stackelberg

IIf we have time: linear city model + monopolistic competition

2

Practicalities (cont.)

I Lecture notes will be uploaded to

Ieither your course page

Ior a specially made page at paltseva.com

Iwill tell you more later

I Textbooks:

IVarian, Intermediate Microeconomics

IPindyck, Rubinfeld, Microeconomics

IJehly, Reny, Advanced Microeconomics Theory

Isome material from

ITirole, Jean: The Theory of Industrial Organization

IShy, Oz: Industrial Organization

I see syllabus

3

Plan for today (lectures 1 and 2)

I Monopoly

Isingle-product monopolist

Imonopoly and social e¢ ciency; regulation of monopoly

Inatural monopoly

I Monopolistic price discrimination

I1st degree

I3rd degree

I2nd degree

Ifully non-linear tari¤

Itwo-part tari¤

Itying (if time permits)

4

What is a monopoly?

I Monopoly - a single price-making player/seller in the market

I a sole supplier of a good for which there is no close substitute

I not a price taker, unlike in perfect competition

I“Monopolistic” buyer is called monopsony

I Example: city-enterprises

IUsually “monopoly” is an extreme/an abstract concept – opposite to “perfect competition”

I In real life, most often oligopoly or monopolistic competition

5

Russian banking industry: Monopoly? Oligopoly?

6

Sources of monopolistic power

I Barriers to entry

I Legal

I patents

I Technological

Iaccess to critical resource

Inatural monopoly (e¢ cient size of a …rm is too large, only one …rm survives on the market)

Iknow-how, technological advantage

I Regulatory

Inatural monopoly (e¢ cient size of a …rm is too large, only one …rm survives on the market)

7

Problem of the monopoly

I Assume

Imonopolist produces only one good, which is given

Iits quality is known to the consumer

I Monopolist solves

max pD(p) C (D(p))

p

I or

max qP(q) C (q)

q

I Let’s look at the second formulation:

I FOC

P(q) + qP0(q) = C 0(q)

IUnlike competitive …rms, monopoly accounts for changes in demand due to its own price change

8

Problem of the monopoly (cont.)

I Let us analyze this …rst order condition

P(q) + qP0(q) = C 0(q)

ILHS - marginal revenue (MR) = how does the total revenue change if the monopolist increases the output by one unit

MR = ¶TR = P(q) + qP0(q)

¶q

IRHS - marginal cost (MC) = how does the total cost change if output is increased by one unit

9

Marginal revenue

IHow is marginal revenue curve positioned relative to the inverse demand curve P(q)?

MR = ¶TR = P(q) + qP0(q)

¶q

I Since P0(q) < 0, MR(q) < P(q)

p

p(q)

TR

I Btw, what is marginal revenue in case of perfect competition?

10