Okay, new chapter again. Let's call this 15, part
1.  We're going to cover monopoly and
monopoly is more or less the unideal. 
If you think back to our spectrum
analogy, monopoly was on the far side
away from perfect competition.  You're
going to get your highest prices and
your lowest quantities.  We're going to
highlight the difference between these
two market structures in this
presentation.  In order to understand why
a monopoly is able to do this though
we're going to have to spend just a
little bit of time talking about
barriers to entry.  Barriers to entry are
really the secret to maintaining
monopoly.  The monopolist is essentially a
price maker, they choose where they want
to be on the demand curve.  Now that's
essentially the same as a mono comp firm.
What I want you to realize is the
difference between monopoly and a mono
comp firm is really just that a
monopolist has no fear of substitutes, so
there's not much limitation on them at
all.  They're generally going to have a
much larger market than a mono comp firm,
and since there's no substitutes they're
going to have a much steeper demand
curve... and of course a steeper marginal
revenue curve.  So what does this really
mean for the monopolist.  It means profits.
They're going to be able to make a lot
more profits than a mono comp firm
generally, and for society it means that
you're going to pay higher prices and
there's going to be less quantity
available.  I want to model that for you
in the next coming slide.
Okay let's go ahead and walk ourselves
through a little thought experiment.
We have a hundred perfectly competitive
firms and we're going to merge them all
into one.  Essentially we're going to make
a monopoly, but that monopolist doesn't
really have any advantages from cost or
anything else.  The only thing they have
going for them is that they collectively
make a decision as one,  essentially like
a cartel.  When we look at the way that
that one firm would behave in comparison
to what we would expect 100 independent
firms to do you can isolate what's going
on with market power or price making
power.  So let's go ahead and start out
with our perfectly competitive scenario
under perfect competition we knew that
those firms always ended up producing a
quantity that had a price equal to marginal
cost.  The only spot that that's true on
this graph is right here at this spot.
You are going to end up with Q for the
competitive firm.  This is the price the
competitive firms would end up charging.
We're going to get ourselves to the
minimum of the ATC, which happens to be flat here
based on our assumptions, and P is equal
to MC at that Q.  We're going to compare
that now to what would happen if you had
a monopolist. If you had a monopolist they're
immediately going to start recognizing
that as they provide more or less
quantity it influences the price that
they're going to be able to sell it all
at.  They are going to look at this and
say well I I'm going to want to go where
MR equals MC.  Keep in mind for
imperfectly competitive firms
price and marginal revenue are very
rarely the same thing. 
MR equals MC here.  This quantity is the
monopoly quantity and of course it is
going to sell at a higher price, so the
natural outcome for a monopolist, even if
nothing changes except for the fact that
there's one instead of many, is that you
are going to restrict quantity.... and as
you restrict quantity you are going to
raise price.   The consequences of this are
fairly obvious.  One, you have a whole lot
of quantity that does not get sold, so a
monopolist and any firm with market
power is generally going to generate
some deadweight loss.  You lose some
transactions.  Now they don't mind this,
because the producer is grabbing this
box here as additional producer surplus,
profit essentially, that of course came
out of what was originally the consumer
surplus triangle.   So a monopolist or any
other imperfectly competitive firm by
restricting quantity and raising prices
is going to capture part of consumer
surplus and turn it into profits.  The
downside is that they are going to cause
some deadweight loss. 
This is why people get concerned about
less and less competitive markets....
growing deadweight loss represents
inefficiency within those markets.  You
might be able to stomach the fact that
consumer surplus was getting gobbled up
as profits because it was still
efficient... right?... no one paid for products
they weren't willing to pay for, but the
deadweight loss is clearly and
unequivocally a bad thing.
In summary I just want to make sure that
it's really clear... Imperfectly
competitive firms, monopolist being the
worst of the bunch, are always going to
restrict quantity and they're going to
drive up prices.  What this means in terms
of the real big picture is that
productive efficiency is generally going
to suffer.  Allocative efficiency is
certainly going to suffer because the
last unit that they create is always
going to have a higher marginal benefit
for consumers at at least than the
marginal cost of the firm's creating it...
but the monopolist is never really going
to worry too much about that because
they are of course maximizing their
profits.  When they choose to produce Q
star,  Q star for them is where their
marginal benefit MR is equal to MC,
they're not concerned about the fact
that society still values it more than
the cost.  So it appears that a monopolist
is somewhat at odds with society
regarding efficiency and this has a long
tradition going all the way back into at
least Veblen.  Veblen basically said that
every firm has an interest in destroying
competition so that they can actually
maximize profits,  and monopoly power
suggests that those really nice outcomes
go by the wayside.  You're going to not
get minimum prices any longer... you're
going to get a maximum price... and you are
not going to get a maximum quantity...
you're going to get a minimum quantity.
So in terms of our spectrum from perfect
competition to monopoly we learned that
this max P and minimum Q was a result of
monopoly power.  It's the antithesis of
our ideal on the perfectly competitive
side.
