1. Monopoly Capitalisms norm. And its necessity

2. The BIG Ideas

• Monopolists raise prices above MC by reducing output. This makes them rich at our expense.

• But capitalist firms can only survive with some monopoly power. Perfectly competitive firms cannot survive.

• Monopolies survive by controlling location, talent, technologies, reputation, or because there are economies to scale.

3. Just to get it out of the way One version of this game was invented by a follower of Henry George who believed that the fundamental problem in America was monopoly over land.

4. Monopolies act knowing that they can sell more only at a lower price They think about the effect increasing production has on inframarginal sales. They produce only if marginal revenue is at least equal to marginal cost, MR=MC. They are smart. You can be too!

5. Starting with Perfect Competition Equilibrium at A

6. Perfect Competition Maximizes Social Surplus

7. Perfect Competitors lose money because they ignore fixed costs Equilibrium at A

8. Monopolist produces less, at MR=MC, and sells at higher price PC Equilibrium at A

9. Monopoly reduces and transfers surplus

10. Comparing Monopoly and Perfect Competition

11. Perfect competitors lose on their last (marginal) sales Perfect competitors produce at P=MC. There, MR

12. A monopolist is the only seller of its products This includes companies that are the only sellers of products in their industry such as a local cable operator. Every company that puts a name on a product is a monopolist. These include Intel, Microsoft, Boeing, Antonios Pizza, and Bills Grass. All of these have a monopoly in their particular products.

13. How monopoly is different from perfect competition

• Monopolists produce less.

• Monopolists charge more.

• Monopolists dont produce where MU>MC; i.e. where we wish there would be production.

• Monopoly allows capitalist firms to survive.

14. If capitalism needs monopoly, why do orthodox economists emphasize perfect competition? Perfect competition is nicer because it aligns firm behavior with social benefits. Under PC, firms produce until MU=MC, maximizing consumer and producer welfare. Under Monopoly, firms produce less, lowering total welfare

15. Here is how Monopoly changes things They reduce output At lower output they raise prices Higher prices redistributes consumer surplus to monopolist Lower output means some lost surplus

16. Sources of monopoly and market power Economies to scale and high minimum efficient scale A typical factory to build semi-conductor chips costs $2.5-3.0 billion. Few companies can invest that much to compete with Intel.

17. Network economies and lock in Competition is limited where consumers need to consume the same products, or where you are locked-in to buying a companys products because of past investment. Microsoft benefits from network economies because consumers want to talk to each other within Windows-world. Printer and razor companies are good at lock-in.

18. Location Control a good location and your competition is DOA. Would you want to own a parking lot next to Fenway Park? They charge $45 to park during a game.

19. Information and Brand Name How much extra will you pay for this? Do you feel safer in one of their planes?

20. The strongest monopolies control talent Wed be doomed without him:

21. Take-away Question Since monopoly is the norm, and even necessary for a capitalist market economy: why do orthodox economists largely ignore it to focus on the imaginary, and illusory, world of perfect competition? Could it be that they just want to make capitalism look good? She didnt think so. Economist Rosa Luxemburg

22. Take-away points

• Monopolists raise prices above MC by reducing output. They redistribute income towards themselves and reduce social welfare.

• Without monopoly pricing power, almost all firms would go out of business.

• Monopolies are established by controlling location, talent, technologies, reputation, or by economies to scale.