Economic Welfare:

Monopoly
p y v. Perfect Competition
p
 Agenda
 Societal Welfare/Economic Welfare:
Criteria
Consumer Surplus
Producer Surplus
 Compare Monopoly and Perfect
Competition
 Price Discrimination
 Economic Welfare
 Consumer surplus measures
economic welfare from the
buyer/consumer perspective.
 Producer
P d surplus
l measures
economic welfare from the
seller/producer perspective.
 Consumer Surplus
 Consumer surplus is the amount a buyer
is willing
g to pay
p y for a p
product minus the
amount the buyer actually pays.
 Consumer surplus is the area below the
demand curve and above the market price.
A lower market price will increase consumer
surplus.
A higher market price will reduce consumer
surplus.
 Producer Surplus
 Producer surplus is the amount a
seller is paid for a product minus the
total variable cost of production.
 Producer
P d surplus
l isi equivalent
i l to
economic profit in the longg run.
 Economic Welfare
 Economic welfare can be quantified
as the sum of consumer surplus and
producer surplus, i.e. equal weights
assumed.
assumed
Consumer Surplus and Producer Surplus:
Market Equilibrium
Price A

D
Supply

Consumer
surplus
Equilibrium
E
price
Producer
surplus

D
Demand
d
B

0 Equilibrium Quantity
quantity
Monopoly vv. Perfect Competition
 Monopoly and perfect competition
can be compared/contrasted by
using consumer surplus and
producer surplus (i
(i.e.
e by using
economic welfare/societal welfare
measures).
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC For PC, output
will
ill be
b sett att P =
P MR = MC
Recall that for PC:
MR AR Demand
MR=AR=Demand

Qpc Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC Price is Ppc
P

Ppc

Qpc Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC Recall that for
P monopoly, MR 
Demand

Output is set
Ppc where MC = MR

Qm Qpc MR Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC The monopoly
output is less than
P
the perfectly
competitive output
Pm
Ppc

Qm Qpc Demand Q
MR
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC The monopoly
output is less than
P
the perfectly
competitive output.
Pm
Ppc (The monopoly
(Th l
price is higher
th the
than th perfectly
f tl
competitive price.)

Qm Qpc Demand Q
MR
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC The green area
represents the
P
deadweight
loss (triangle)
Pm
of Monopoly
Ppc

Qm Qpc MR Demand Q
 Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC
“Loss” in
consumer
surplus

Demand
The green area from the previous diagram
h been
has b enlarged.
l d
 Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC

“Loss” in
producer
surplus
p

Demand
The green area from the previous diagram
h been
has b enlarged.
l d
Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC CS+ PS =
welfare loss
CS associated
with
PS monopoly =
DWL 

Demand
The Deadweight Loss (“Triangle”):
All ti Inefficiency
Allocative I ffi i
MC CS+ PS =
welfare loss =
CS DWL 

PS

Demand
Allocative inefficiency: (P  MC)
Allocative Inefficiency: DWL 
 Economic Efficiencies:
Monopoly v. Perfect Competition
Comment PC v. M
Allocative P = MC  MX
PC
Efficiency
Productive Minimum point PC M X?
Efficiency on AC Curve (Check)
Excess profit Rent seeking? PC M X
X-inefficiency Cost inflation PC M?
Technical R&D PC ? M ?
progress
 Price Discrimination
Monopoly v. Perfect Competition
 First degree (perfect) price discrimination
– Each consumer pays her/his reservation price.
Th producer/
The d / seller
ll captures
t all
ll consumer
surplus
– Implication for Monopoly v. v Perfect
Competition? (MR = AR  P = MC in
monopoly, i.e. allocative efficiency)
 Second degree price discrimination
– Bulk discounting
– Non-linear
N li pricing
i i
 Third degree price discrimination
– different prices to different groups
groups.