good afternoon everyone
um did anyone make it to the lecture this
morning by any chance in this class um
I'll give you a brief summary of it I think it
was really interesting so Brian talks about
one of his projects he's doing where he
worked with a number of folks in the
Philippines and they ran a large field experiment
with 70,000 people and what they did was
when people were applying to jobs and these
were like customer service style jobs on
the phone they randomized whether their initial
interview was with a human or with an
AI agent and these AI agents are relatively
sophisticated they can like talk with you
and unless you're told you don't know that
it is an AI agent and what they wanted to
see was who's better at getting the
requisite information or what he says the
signal that someone will be a good worker
and they randomize these people between
them and they found that the AIs
were much better at getting the information
from the workers. Through the AI process
more people were hired and more importantly
more people stayed in the job when they
were hired by the AI worker compared to the
recruiter. So that's the elevator pitch. I
think super interesting especially going
back to all the stuff we talked about with
AI and yeah if you have any questions
about that I'm happy to send you the materials
so we finished up last class talking about
how monopolies form and we spent time
talking about the first five so this idea of
economies of scale when there's a huge
upfront fixed cost so something like building
an entire power grid and after that each extra
unit you produce of electricity is much
cheaper than the previous one because of
its upfront fixed cost then a lot of
people won't go into this industry
because they can't afford the upfront
fixed costs. Then there's control
of an essential resource. So we had
that De Beers example that they earn 90% of
the world's diamonds. OPEC would be another
example as well. Maybe not necessarily
a pure monopoly but they have a lot
of control over oil. Patents and intellectual
property. So this is the idea that no one
else has the propriety to produce and sell
the same product as you for at least 20
years in the US, and someone in, I think it
was in the next class, brought up a really
interesting point, especially about drugs.
So when you have a patent for a drug, you're the
only one allowed to sell the drug for 20
years. After that, generic brands and
anything can end up. But still, there's a premium
on having the copyright, the name. So in the
US, we don't call paracetamol paracetamol.
What do we call it? Tylenol. So, Tylenol
is paracetamol, that's the generic brand, but
a lot of people will still pay three times
the price for Tylenol because it's a recognized
brand name. So the copyright is really
important here for a lot of firms, even
though the most, I don't want to say the word
rational here, the better thing to do would be
to just buy the generic brand, it's the exact
same drug. So, if you're still buying
Tylenol, switch to the generic brand. That's my
advice. Then we talked about government
licenses and franchise. This is the example
with like taxi medallions that
were the only people allowed to transport
people for money before Uber and Lyft
existed and these were handed out
by the government. And then finally
we spoke about this idea of
network effects. So the idea of social
media is more popular the more people are
on it so it has these network effects we
started off with myspace in 05 went to facebook
in 2011 insta in like 2017 and now everyone's
congregated on tiktok then i gave the
example about microsoft um as well having
all these um programs written specifically for
um microsoft so it was hard to switch away
from that and finally we have one last
thing that we haven't discussed yet, so strategic
predatory behavior. This kind of appears
in two different ways. So the first, in both
cases, the current firm, if there is a current
monopoly, they'll take deliberate strategic
actions to deter or eliminate any possible
competitors from entering the market. So
these actions will raise the rivals costs or
cut off their revenue or signal that entry
will be unprofitable unprofitable even if the
actions are costly to the incumbent in the
short run so a really well-mored version of
this is whenever there's a you know a little
firm that tries to enter an industry so think
selling you know goods if you're in the same
city as like a Walmart for example Walmart
will just completely price you out they'll
lower their prices even if they lose money
in the short run because they know two things
one this other you know firm can't keep
up they just don't have the same you know um
scale as as walmart and it also sends a signal
to everyone else this is what happens when
you enter the market so it allows them to
maintain so like lowering your prices below a
point where you actually make a loss in the
short run can actually be beneficial to these
firms to to keep their hands on the monopoly
um yeah threatening price wars as well
when we speak about prisoners dilemma scenarios
as well people are willing to shoot themselves
in the foot if it hurts someone else
it's kind of like i'm crazy i'm willing to do
this so you better back off and then there's
also um the non-legal ways of looking at this
so if any of you watch like breaking bad or
the wire you probably heard saying like you
know um this is my corner no one else can
sell here sell being illicit drugs and they'll
go into to certain you know they'll go
to certain means like hurting people etc to
disincentivise others from being in the same
business or industry. So that's more of the
black market side of things as well, getting
into those situations. So these are all
the situations that monopolies
can arise. And as the non
-democratic leader of this classroom, I am giving
you all a licence to be your own monopolist
in your own market. there's going to be no
other producers and your aim in this game is
to make as much money as possible as the
monopolist. So there's going to be 10 rounds
in this game and you're going to have a
production cost and your production decision
must be between and including 0 and 13 units
and the cost associated with this production
is $1 for each unit produced. So your total
cost is simply calculated by multiplying how
much you decide to produce multiplied by
a dollar. So if you produce five units it's
going to cost you $5. If you produce 4.73 units it's going to
cost you $4.73. The price. What is the price in this market? All units produced
will be sold for the exact same price. So
if you produce three all three will be
sold at the same. If you produce seven all
seven will be sold at the same price. And
this depends on the total amount that you
produce and a random shock. The more that
is produced, the lower the price tends
to be. So if you produce six, it will
be probably lower than the price when you
produce five. The more that is produced,
the lower the price tends to be, although
price is subjected to this random shock
each round as well. Price will be
positive, unless your production is high
enough to drive price down to zero,
then it'll be zero. Your sales revenue is
calculated by multiplying your production
quantity and the price since you do not know
the price in advance you only know your output
that's what you decide you will not know your
total revenue from sales okay so your
earnings your profit is just the difference
between your total revenue and your production
cost so that's just the quantity of output
times the price that's your revenue and then
the quantity of output times the cost which
is one dollar that's your that's your cost
so this is your profit obviously earnings can
be positive if price is above cost but it
can also be negative if price is below
cost monopolists don't have to make positive
profits as some of you are about to find out
the program will keep track of your total
earnings positive earnings in round will
be added negative will be subtracted and once
again as per usual whoever's our best
monopolist whoever makes the most amount of
money will get a prize so there's always
incentives in this class. Alright, so if you
go to viaeconlab.com, BLGR27, this is
individual, you're the only firm in the
market, and away you go. Does anyone have
any questions? Brilliant. And you
can like chat strategy with the people next
to you, I don't like it being quiet during
these things. So the instructions
are the exact same as I just
said, there's just a couple of little
comprehension questions to ensure
understanding. Yeah, it tells you how
much you made. So you know your
cost so you can back out the revenue
or something. Remember there's
a random shock as well, so you can't
specifically come down the demand. It
makes this harder. The way it is, you
have to choose an exact amount. That's how I
said that. Okay, cool. You done? Okay, so...
Okay, we have a leader because
we have someone. 348.31 is our
current leader. Is that what you
have? 348? Okay. So an average of 34.8 per round, that's
pretty good. D.K., how are you doing? Ivan, what did you get? Not good. Stick to the competitive markets then?
Is that the... I got it. Okay, did you get
any negatives? The first one.
Okay, okay. The Monoculus
lock is not cut out to you. No,
I don't remember. Really? Yeah. No. 353. 353? 43. Oh, you upgrade,
what is it? 48? Okay, so it's on the
way. It's up to 41. Okay, 41. Nice. Remember, the
random shot plays a big role here
as well. Skill can only take you
so far in line. Yeah, I do know
what they're in the shop, because
I set it up. If this was golf,
you'd be winning. Brian, how do we do? 307? 302. What did you get? Okay, so I'm trying
to remember, what was our lead? Is
it 340, what is it? 340, what is it? 340, what did you get here? 340, what? Yeah, we have a new lead at 349 dot
what? 57 was it? 54, yeah, cumulative, yeah. 352, 352, 352, I'm sorry, what's your name
again, sorry? Okay, Moses in the lead. 353, sorry,
Moses, you've been taken, what's
your name, sorry? Julian in the lead. 46, that's an important 46. Can anyone beat that? DK can't beat
that? No. Moses, have you won
anything yet? Yeah. Okay, cool,
sorry, not Moses. I'm glad you
won something. Julian, have you
won anything yet? Well, I don't
think anyone can beat that, so you
won. Congratulations, man. Come on up, Julian. Julian, as you're
coming up, why did you do so well? What
was your strategy? I started with six,
but I was kind of lucky. I went up to
nine to see, and I just went back. So why did
you start with six? It seemed like
a middle value. No, it's not. Okay,
you can choose between the
kangaroo koala, the little purview
basketballs. They're together.
Yeah, they're together. They come
as a package. I'm not going to separate
you. Oh, nice. Okay, tell your
mom I say good day. Great. Okay, Ivan, how
did things don't fall apart for you?
What did you do? I just tried to go for $13,000 at the start. What was the intuition
behind that? Just sell as much as possible?
I thought it was just a random price, so I
figured like... Okay, all good. 14, and
then I dropped down to 12, and
my market price went up, and then
went back to 13. Okay, just to make
sure, yeah, yeah, yeah. I dropped down, I
think it was like 8 or 9, and then that's
where I spent it. Nice, nice. Well, as we
learned today, the key difference between a
perfectly competitive market and being a
monopolist is, as a monopolist, when you
change your output, this does affect the
price. This directly affects the price, and
that's the key thing. Anyone have any more
insights on their strategy that they
want to share? okay great so let's
talk about monopolists oh yeah so i've got a
summary up here of the different types um
and yeah so this is available for you on
bright space with this lecture to have a look
at the key takeaways as well so the question
is how do monopolists go about making a profit
and do they always make profit we have
our little monopoly man here so as we just
talked about perfectly competitive firms are
price takers no matter how much they choose
to produce because they're just a small
player in the market they cannot individually
affect the price by producing more so as a
result each firm faces a horizontal demand
curve which is just the price and that's
just what they're much and that's just what
the marginal revenue is going to be the price
however monopolists are price makers and
they set the price by choosing their output
level as we just showed. The less you produce
the higher the price the more you produce
the lower your price all the way down until
zero which is also possible and rather than
facing this horizontal demand curve they
face this downward sloping demand curve
for the entire industry. So as you can see we
have our on the right our price taker here
we have our price taker so no matter how
much they choose to produce whether it's
zero units ten units a thousand units it's
not going to affect the market at all it's just
too small move there's too many other players
so they always face the same price and
this horizontal demand curve however when
there's a pure monopoly there's only one firm
in the industry so how much you choose
to produce is going to intersect the demand
curve at different points and as you can see
this is directly going to change the price
so if you produce let's say two units
here this vertically intersects the demand
curve here the price that people will be willing
to pay is up here when there's only two
units whereas if you produce a whole lot of
units it will intersect here and it will
result in a lower price that people are willing
to pay for given there's so much around
so your decision as monopolist to produce
at a certain point is going to impact the
price and this also depends on the structure
of the demand curve. So unlike the marginal
revenue being the price the marginal revenue
if you remember before from our elasticity
lecture is what you essentially get when
you decrease the price. So two things to keep
in mind remember the marginal revenue curve
is always below the demand curve because
when you decrease the price from let's say
five dollars to four dollars you're not
just putting $4 on this extra unit you're
producing, you're making it $4 for all the previous
units as well. So you can do better by
lowering the price, but because this lowers
the price on all the units, this results in
the marginal revenue curve always being
below the demand curve. And the other thing
to keep in mind is, as you can see, when
we're in this elastic area, the marginal revenue
is always positive. Always positive. It's
above zero at the unitary point at zero
and when it's inelastic as less than zero
if you remember this is because if you
lower your price by one percent when you're
in the elastic zone more than one percent
of people will now demand the good so this
trade-off is worth it you're making more
revenue you're making more revenue we're
not talking about cost right now we're only
talking about revenue so this continues all
the way until zero the unitary elastic point
then once you get into the inelastic section
if you raise your price by one percent
less than one percent of customers will increase
their demand so you're not making the
money back by decreasing the price by one percent
as a result you get negative marginal
revenue as you continue decreasing your price
and this plays out in the revenue graph here
so you can see from zero to q zero revenue
is increasing but it's increasing at a
decreasing rate. So when we're at this point
here, if we produce one more unit, we get this
much marginal revenue. And where we're here
and we produce one more unit, we get only
this much marginal revenue. So it's still
positive, but each extra unit we produce,
our marginal revenue increases at a decreasing
rate. You get slightly less than before, but
it's still positive. So if you just want
to maximize your revenue, you'll stop
at this point here, Q0. Okay, I'm actually
going to open this up. We'll come back
to this in a second. And this idea of
monopoly pricing, we can see an
example here from a great show called
Bob's Burgers. Here comes travel.
Oh, brother. Hi, my wife sent me
here for costume supplies. I'm glad
you're still open. I just need a few
things. You hear that, Harold? He just
needs a few things. Oh, don't we all? Okay,
do you have fabric glue? Do we? I forget.
And purple felt. Purple felt. And orange felt
and yellow felt. Oh, sure, we've got those
things, but it's going to cost you. Right,
well, that makes sense, because I'm the customer.
No, because it's Christmas Eve. On
Christmas Eve, we jack the prices way up. We
jack them to the moon. Why are you advertising
that? Also, please don't jack the prices.
To the moon, chums. And there's nothing
you can do about it, because it's Christmas
Eve, and you need felt. Oh my god. You
know, we're having a hell of an after
-Christmas felt sale. Tell him about it. But
you can't wait till then, can you, Jones?
No, I can't. You know I can't wait till
then. I really wish we had another art
supply store in town. So, there's two key
points here. One is, um, Bob's demand in this
clip is, is inelastic. He needs the felt
today because it's Christmas Eve. And
the second point, um, is, like, they're
acting, like, really rude and everything because
they can. They're the only felt store in
town. So as a monopolist, they can charge
exorbitant prices. In fact, they can
advertise the fact that they charge exorbitant
prices. And there's nothing anyone can
do about it because they're currently the
only firm. I don't know how they became a
monopoly, but they are. So remember
when we talked about the
elasticity lecture, the marginal
revenue function can be looked
at in this way. Price times one plus
elasticity divided by elasticity. and as we
said before marginal revenue is greater than
zero when something is elastic so the
elasticity is less than minus one something
like minus 10 marginal revenue equals zero when
the elasticity is at the unitary elastic
point minus one so if e is minus one one minus
one is zero and this entire you know term
just disappears and becomes zero hence
marginal revenue equals zero and when it's
between 0 and minus 1 then it's going to be negative
and I'm not going to go over this again
but this is essentially how we can get to
that function we have our total revenue
which is just the price as a function of q
times quantity and then we take the the derivative
of the change in revenue given the change
in quantity we can do some little
mathematical tricks and we end up with the same
thing so I have those slides in elasticity I'll
put them back in here as well if you want
to go over it but the takeaway here is the
marginal revenue curve is simply price times
one plus e divided by e okay so given a
linear inverse demand function so price is
a function of quantity equals a plus b times
q where a is some intercept parameter greater
than zero and b because of our law of demand
is going to be less than zero it's going
to be negative the associated marginal
revenue is going to be a plus 2bq and that's
because price is only one factor of our revenue
revenue is quantity times price so quantity
times price as a function of q just
equals q times what our function is here a plus
this sorry this shouldn't be a 2 should just be
bq multiply together we get aq plus bq
squared and then to get the marginal
revenue of total revenue function we just look
at the change in revenue given a change in q
so we take the first derivative of q and we
end up with a plus take the two out the front
so 2bq reduced about by one that's how we
get the marginal revenue from the linear
inverse demand function suppose this linear
inverse demand function for a monopolist is
p equals 10 minus 2q what is the maximum price
per unit a monopolist can charge to be able
to sell three units what is marginal
revenue when q equals three so the first
thing to keep in mind is the maximum price is
simply what they can charge when there's three
units being produced so we just plug in the
three for the units being produced and we
can see the maximum that they can charge per
unit is four dollars they can charge less
than that if they really want but if they're
profit maximizing they're not going to do that
and the marginal revenue at three units
for this inversely demand function is simply
the the the price multiplied by quantity
so we get 10q minus 2q squared take the first
derivative of that and we get 10 minus 4q
minus 4q and so this is the minus 2 times 2
that's the minus 4 and we just plug in the q
10 minus 4q 10 minus 4 times 3 and that gives
us actually a negative marginal revenue minus
two so we're already beyond the point
of something being unidelastic here so like
everything else we've talked about so far the
monopolist maximizes their profit when
marginal revenue equals marginal cost nothing
changes we talk about consumers we talk about
producers marginal benefit equaling larger
cost marginal revenue equal marginal cost
this just holds all the time so as you can
see here this is our revenue function this
increasing at a decreasing rate concave function
then we have a convex cost curve so cost
is always increasing and the slopes are the
same at QM at QM that's when they have the
same slope that's when the marginal revenue
equals the marginal cost and that's the
production point and as you can see this is the
point that maximizes the profits if you produce
anywhere else you're either leaving money
on the table when the marginal revenue
is greater than the marginal cost or you're
producing too much when the marginal cost is
greater than the marginal revenue nothing new
here what's new here is what this looks like
so we have our linear demand curve as you
can see we have our marginal revenue curve
which is linear and downward sloping as
well always below the demand curve this is
really important then we have our marginal cost
function which kind of has this quadratic
nature and our average total cost so it starts
off high because of the fixed cost and then
as marginal cost is below it it drags it
down and brings it back up again so at
marginal revenue equals marginal cost it occurs
here at q and remember for whatever the output
the price that the monopolist charges
is going to be where that output intersects
with the demand curve so they're going to
charge pm here the price of the monopolist
and the profit of the monopolist is just
the difference between the um sorry the price
is not the profit the profit is the
price how much they get minus the average
total cost of each unit that's the profit they
get on each unit and then you want to
multiply that by how many units they sell so
this whole blue area here is going to be the
monopolist profit so if I go to go over
here you can see yeah so you can kind of
see here and I'll put this up it's just like
looking at monopolist prices so let me get
rid of the fixed cost I'll make things easier
so what we have here is the blue line is
the demand curve the red line is a marginal
revenue curve which is always below the demand
curve the green line is the marginal cost
and the yellow line is the average total
cost so currently as you can see this monopolist
is producing where the marginal revenue
the marginal cost intersect this is the
output here this white line as you can see
and this touches the demand curve here at this
point which is a price of I mean it says
71 here and 70 here around 71 or 70 so the
difference between the price is selling at 71
and the average total cost per unit which is
down here the yellow line where it touches
the yellow line multiplied by the quantity
gives the the profit so 30 quantity the
price here is is is 70 and then that gives
you the total revenue minus the total cost
that's another way to get the profit and as
you can see we can change of the demand curve
we can change the intercept and the higher
the intercept is or the steeper you know
this demand curve gets the more profit this
firm is getting and you can play around with
the other intercept as well the more quantity
that they're able to produce the more
profit they get as well and then you can
play around with the marginal cost you see
the higher the marginal cost the more the
profit shrinks and the quadratic cost nature
as well is going to make it shrink as
well. So I'll put this up for you to play
around with but that's the idea of showing the
relationship between marginal cost, marginal
revenue and the firm's profits when
they're a monopoly. Oh no, I went
all the way back. So this is just
what I said. So the price of the monopoly
is the place where the quantity of the
monopoly intersects with the demand.
The horizontal I'm sorry, the
vertical intersection. all right so suppose
the inverse demand function for a monopolist
product is given by p equals 100 minus
2q and the cost function is 10 plus 2q for
this monopoly what is the profit maximizing
price quantity and maximum profits so
for the most important thing what is the
profit maximizing price how do we figure
this out what is the first step we take in
this situation anyone want to take a guess
where where would you start here in what
situation does a monopoly or any firm maximize
their profits yep equals yeah marginal
cost equals marginal revenue we have our
price and we have our cost function this is
more than enough to determine both so as
you can see the first thing we want to work
out is our marginal revenue so our total
revenue is just price times quantity we
know what the price function is we've been
given it so price times quantity is just
quantity times our price function 100 minus
2q expand that our total revenue function
is 100q minus 2q squared and so if we want
to see how revenue changes if output
changes we just take the first derivative and
so this just becomes 100 minus 4q. That's
our marginal revenue. And our marginal cost
function is pretty straightforward. It's
linear. So if you increase output by one, cost
increases by one. So marginal cost equals
two. We now have our marginal revenue and our
marginal cost curves. Everything falls out
from that. So the profit maximizing output
is found by solving this. Marginal revenue
equals marginal cost so 100 minus 4q equals
the marginal cost which is 2 and you just
solve that and you find that the answer is 24
.5 that is the amount of output this monopoly
will produce 24.5 units and the profit
maximizing price what we want to find out
remember is where this output hits the demand
curve so we plug it back into the demand
curve so we put in 24.5 into the inverse demand
function here so we get 100 minus 2 times
24.5 and we find that the price that will
be charged when the output is 24.5 is $51 and
now we have everything to calculate the the
maximum profit that this monopolist can
make so they're making $51 the price times
24.5 the quantity that they've produced and
sold that's the revenue minus the cost which
is 10 plus 2 times how much is produced 24
.5 add it all together that gives you the
maximum profit so the key thing here the key
thing is knowing how to get started with questions
like this marginal revenue equals marginal
cost the profit maximizing condition
for everything really so in these perfectly competitive
markets remember the price is the marginal
revenue the price is the marginal revenue
so the the the price is the marginal revenue
which equals the marginal cost um and so
a supply curve exists in these perfectly
competitive markets however the monopolist
market power implies at any point as we saw
the price is going to be above the marginal
revenue curve price is here marginal revenue
is here so price is always above marginal
revenue so a monopolist determines how much
to produce based on marginal revenue which
is less in price a changing quantity will
change market price as a result there's actually
no supply curve for a monopolist or in
markets served by firms that have market power
they just decide how much output to produce
and then that lines up with the demand
curve to produce the the price so there's no
supply curve intersecting here with the demand
curve we just care about the marginal
revenue and marginal cost A monopolist may earn
positive economic profits, which in the
presence of barriers of entry is going to
prevent other firms from entering, so
they will make these positive profits over
the long run. However, monopoly power
doesn't necessarily guarantee
positive profits. This depends on average
total costs and what your outside options
are. Here's an example of a monopolist that
isn't making positive economic profits. so
the marginal revenue equals the marginal
cost as you can see here at qm we add it up
and it hits the demand curve here so the
price is going to be pm and as we know it's
the difference between the price and the
average total cost times the output to find the
profit but the difference between the the the
price and the average total cost here is
zero so they're not making any economic
profit. Like you could be a monopolist right
now if you wanted to over something that is
completely irrelevant. I don't know, a monopolist
of fax machines. No one's going to
buy that from you. So just because you're a
monopolist of something, you own the rights
to something or the other one, you can
produce something. There are two things that
could occur. One, no one actually really wants
to buy. The average cost still might be too
high. Or three, your outside options might
be better as well so it doesn't necessarily
guarantee positive profits it depends on
the industry and these other conditions so
we're the only one selling this good all
right so we've talked about how monopolies
occur we've talked about how monopolists go
about pricing actually i should show you one
important thing um actually i'll show you
in a second but as i've talked about a lot
monopolies are bad so why are they bad the first
one the most important one here is this idea
of dead white loss remember this is one
of our four examples of market inefficiency
when a monopoly exists we have inefficiency
so how does that occur so okay imagine
there's no monopolist here the marginal cost
curve would be the supply curve and the
demand curve is obviously the the yeah the demand
curve here so in a perfectly competitive
market we would have an equilibrium point
here at PC and a QC. That's how much production
there would be if things were perfectly
efficient. But as you can see, the monopolist
produces where marginal revenue equals
marginal cost, so they produce here, at QM,
and this lines up with the demand curve here,
so they charge PM. So what this means
is a monopolist underproduces in
the market compared to what a competitive
market will do. So are losing out of
consumer surplus this triangle here because
they don't get to buy here as they would before
and in fact there's a loss of producer
surplus as well if the firm had produced a
qc instead of qm then they would capture this
area as well because the price would be at
pc here and they'd be producing this area
here so they'd get this triangle so there's both
consumer and produce a surplus loss here
so wait why does the monopolist produce
at a smaller point at QM when they're losing
out of this triangle and the reason is is
because the producer is eating into the
consumer surplus they're eating into it so if
you if we go back to the competitive market I
wonder if I can if I can draw this out
quickly I've not had much luck with drawing design
yeah much luck here I'm just gonna so if we
were at the competitive market I'm drawing
it out so this would be the price this is
our demand curve so this whole triangle
would be consumer surplus here and at the competitive
price this whole area here would be
our producer surplus this triangle I'm drawing
out here so underneath the price above the
marginal cost curve would be producer
surplus so the producer is giving up this
amount and what they're doing is getting this
whole area here this is because the price is
set at pm and this is the amount of output
so anywhere below the price and before the
marginal cost curve is what this producer is
getting in terms of surplus so they're getting
all of this essentially so this rectangle
here this rectangle here and this triangle
here so even though they've given up that
they make up for more of it by getting this
whole rectangle area so they're better off
but look at the poor consumer in this
situation with a perfectly competitive market they
get this blue triangle they get the red shaded
area and they get this triangle area
as well now with the monopolist and the
price here remember it's what's under the demand
curve that hits the price they only get
this triangle here is consumer surplus so the
producer is better off but this is just really
bad for consumers and it creates
inefficiencies in general so the inefficiency overall
is this area here but it's the consumers
who bear the brunt of all of that all of that
producers are actually better off than they
were before is there something else i wanted
to say oh yeah and so as a monopolist
you know you're making um uh you know uh
social welfare worse off but if you end up in
a monopolist situation you should always raise
your prices by lowering your output that's
your profit maximizing choice here this is
basic economics that even walter white knows
you're breaking bad so as walter white says
it is simple economics imagine you're in some
form of competitive market and the
price would be here like um uh walter and
jesse do they get rid of all their competitors
and they could keep things as is and
that actually earned more than before
because they're the only producer now so rather
than other producers eating into this
producer surplus they get the whole surplus here
but as walter white understands he's taking
you know a managerial economics class by
lowering the output and raising the price
while they lose this little triangle here
they're going to gain this much and they
do better so it's bad for your consumers of
meth in the Breaking Down universe but it's
going to be better for Walter and Jesse
as the monopolies. So this is the main
reason economists don't like monopolies. But
there are other issues as well that are
negatives. So the first is that there are less
choice for consumers. So if you remember
in the Bobus Burgers video he was forced to
go to the store, deal with like these nasty
kind of you know sales people there it's
just not a pleasant experience so a reduction
in the competitiveness of a market limits
the options available to consumers there is
only one seller this is a South Park episode
about how annoying cable TV used to be
that you could only buy the packages that they
offered you couldn't like customize it
yourself and I actually have the video clip of
this on the next page I'm not going to show
it I don't think it's appropriate and if I'm
going to lose my job over a clip I'm going
to make it a damn good clip so I'm going
to I'm going to skip over this one but as
you can see from the image he's speaking
with the with the main four kids who are really
upset that they're paying so much money
when they only want two of like the 50 channels
in the package and he's like oh perhaps
you should switch to another cable company
oh there's not another cable company is there
and clearly he's um enjoying himself by
the image so the whole idea from this episode
is that they kind of enjoy screwing
over the customers because they're the
only option no one can deviate away from them
there's no choice. Finally another big
one is we found that this is inefficiency
of just monopolies existing but you
know for a firm they want to be a monopoly
if they can they do better and this
results in something called rent seeking
so this occurs when resources are
used to secure monopoly rights through a
political process. So rival firms that
exist may compete with each other to be
a monopolist and if they're competing by
you know investing in ROD and having
the best product that makes the other
redundant that's a good thing that's
actually a good thing. However a lot of the
ways they go about this isn't through
productive use of their resources it's
through this idea of rent seeking. So the
idea of trying to like curry favour
with the government or other lawmakers to
say, hey, other firms aren't allowed to
enter, essentially. So lobbying is a
big one here. Firms pay lobbyists
millions of dollars a year to go into
Congress and try and bargain and barter
with the elected officials to put in
favourable policies. So this is a complete
waste of resources. Rather than
putting that money into R&D, this is
what they're putting their money into,
paying people to go about this rent
-seeking operation. So this is a
waste of resources that result in
less competitive firms becoming
monopolists. So what are the
solutions to monopoly? I think
I've outlined that in most cases,
monopolies are bad. We talked about that
one trade-off situation in terms of incentivising
R&D. You need to reward companies that
kick gold, kind of. But besides
that, monopolies can be pretty bad. So the first thing
is breaking up the monopoly. So these
are antitrust laws. So this can happen in a
couple of ways. One, sometimes the
antitrust bodies of the country won't let
certain companies merge. So if you have two
huge telecommunications companies and they
want to merge and become one, they won't
let them sometimes. They don't want this
monopoly to exist. Sometimes they'll
see a monopoly form and they'll
actually break up the company into
multiple companies. So I'm not an
expert in antitrust, but it's a huge
deal. So if anyone's done any business
law or any law in general, you've
probably seen this. The second is reduce
barriers to entry, e.g. allow for
foreign competition. So what's the
biggest seller of electric cars
in the U.S.? Tesla, Tesla. And now there's
a little bit more competition.
Back in the day, there was like
no competition. Tesla prices are
relatively expensive. However, Tesla's not
the only electric car brand in the world.
There's a brand in China called BYD, which
is huge. In European markets and in the
Australian market for EVs, there's probably a
50-50 split between BYD and Tesla. They
have legit competition. But through
certain means, Tesla's found a way
to create barriers to entry for BYD to
enter the US economy. And there are certain
arguments to be made for Tesla rent-seeking
and not wanting BYD to enter.
Obviously, it's bad for them. and then there's
also geopolitical arguments as well
which I'm not going to touch with the 10-foot
pole right now. So I just want to say
there could be many different reasons
why BYD itself isn't entering but if you
were Tesla, you would do everything you can
not to let BYD enter. You can regulate
the market. You can force the monopolist
to set the price at the marginal
cost. So as you can see, if we go back
all the way here, that they set
the marginal cost at the
marginal revenue. As a result, they're going to price it here. What happens if
you force them to sell as the
government? You put a price
ceiling at PC here. That means that
they know that they should sell more
units because now, no matter what, they
have to sell at PC. Their marginal
revenue continues to increase until
they get to this point here, until
this becomes zero. They don't have any
control over the price anymore, and
this would bring the market back into
an efficient point. And I don't really know
that many situations when the government
regulates the price in this situation. But
there is a situation that is similar to
this where they do. And I'll get back to
that in a second. We won't have time to
watch the video today, but we can start off
with it next time. The last thing
is to do nothing. Do nothing because
you can't, or do nothing because you
hope there's new technology or new
companies that start off that challenge
to the monopoly. So taxi drivers having
the monopoly over this industry is a
good example of that. Uber and Lyft
disrupted that industry and as a result
broke that monopoly. creative destruction
this idea by Schumpeter is that one firm will
build a technology they'll be the only ones
with that technology they'll have a
monopoly but someone will eventually surpass
them without as well breaking up the monopoly
so there's ideas about that and finally
the idea of monopsony so monopoly is when
there's one seller many buyers monopsony
is a when there's one buyer and many
sellers so this could be you're the only person
the farmers market You can do whatever
you want. They're all going to be calling
out your name, lowering prices, giving you
the best deals ever. And I'll show you an
example of that at the start of the
next class. But a key example of this is
in the labor market. If there's only
one firm hiring in a town, like
one company in a town, they're the
only ones hiring. They can set these
same monopoly type of marginal revenue equal
marginal cost and offer wages below the
competitive equilibrium. So people are like,
oh yeah, I'll be willing to work for $3
less in equilibrium, or I'd be willing to
work weekends, people will be sacrificing
a lot, which will benefit the company.
But in these situations, the government
has regulated, by putting in minimum
wages, by putting in this price floor, they're
able to set it back to equilibrium in
monopsony markets. In competitive markets,
it's disputed what minimum wages will
do, but they're going