Monopolist

Monopolist

P > MR

Figure 27

Any firm maximize profit at the Q when MR = MC

Figure 28

The steps for finding the profit maximization position for the monopolist

1. Find the output where MR = MC. This output is the profit maximizing output call it Q*

1. At Q*, get the value of the price by going up to the demand curve. This price is P*

1. At the quantity, Q*, get the value of AVC. Check the shut down rule.

If P* < AVC, the firm produces 0 and

π=-FC

If P* > AVC, the firm produces Q*

1. Find the ATC associated with Q*

1. Calculate the maximum profits.

π*=(P* - ATC)Q*

From this process, we get the quantity, Q*, that the monopolist produces, the price, P*, that the monopolist charges, and the monopolist's maximum profit, π*.

Long Run Equilibrium in a Monopoly

LR(equilibrium) = SR(equilibrium)

Economic Waste of Monopoly

1. Deadweight Loss (Harberger)

The loss in allocative efficiency caused by the monopolist producing less than the socially efficient level.

Figure 30

1. X-efficiency (Leibenstein)

Monopolists are wasteful since they have no competition to keep them efficient.

Should see ATC going up

1. Rent Seeking (Tulleck)

The monopolist's profits will induce other firms to try to enter the market.

Monopolists will spend resources (money) to try prevent entry. Potential entrants will spend resources to get into the market. Monopolist's profit represent a lower bound on the wastes from rent seeking.

Policy

1. Control monopolist's behavior

The Competition Act

* enacted in 1986

* Amended in 1999

* Replaced Combiens Investigation Act (1910)

* Civil and criminal court

* Competition bureau

(CSIS) - like CIA

Competition Act does not make monopolists illegal. Rather its goal is to prevent abuses of monopoly power. It does this by prohibiting general restrictions trade practices:

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