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 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 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 and increase profit 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 Perfect price discrimination entirely eliminates this inefficiency 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 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 • 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 • 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 and increase profit • 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 • Perfect price discrimination entirely eliminates this inefficiency • 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 • For instance by entering the market early, losing money for a while