What is Wrong with Monopoly Anyway? A competitive firm increases production as long as price is above marginal cost, So in equilibrium P=MC Which means that anyone who values the good above the cost of producing it gets it The efficient pattern A monopoly selling all units at the same price Can increase its sales only by lowering its price So stops when price is above MC By enough that the gain on the last unit balances the reduction of revenue on the others Which means that some who value the good at more than its cost of production don't get it ·Vhich is inefficient Price discrimination can reduce this problem Charge a high price to those willing to pay it,a low price to those not Ideally selling to everyone willing to pay anything more than MC Making ten cents is better than making nothing Perfect price discrimination entirely eliminates this inefficiency Imperfect price discrimination can reduce or increase it Since the goods may go to someone with a low value in the population charged a low price Instead of someone with a higher value in the group charged an even higher high price But perfect price discrimination creates a new inefficiency A firm spending money to make sure that it is the one that ends up with the monopoly And the monopoly profit For instance by entering the market early,losing money for a while. What is Wrong with Monopoly Anyway? • A competitive firm increases production as long as price is above marginal cost, • So in equilibrium P=MC • Which means that anyone who values the good above the cost of producing it gets it • The efficient pattern • A monopoly selling all units at the same price • Can increase its sales only by lowering its price • So stops when price is above MC • By enough that the gain on the last unit balances the reduction of revenue on the others • Which means that some who value the good at more than its cost of production don’t get it • Which is inefficient • Price discrimination can reduce this problem • Charge a high price to those willing to pay it, a low price to those not • Ideally selling to everyone willing to pay anything more than MC • Making ten cents is better than making nothing • Perfect price discrimination entirely eliminates this inefficiency • Imperfect price discrimination can reduce or increase it • Since the goods may go to someone with a low value in the population charged a low price • Instead of someone with a higher value in the group charged an even higher high price • But perfect price discrimination creates a new inefficiency • A firm spending money to make sure that it is the one that ends up with the monopoly • And the monopoly profit • For instance by entering the market early, losing money for a while