Lecture on Monopoly: Costs and Benefits

Introduction

• Discussion on both the costs and potential benefits of monopoly.
• Major cost: Monopoly is inefficient compared to competition, leading to deadweight loss.

Gains from Trade under Competition vs. Monopoly

• Competition:
  • Flat supply curve - constant cost industry.
  • Total gains from trade go to consumers.
• Monopoly:
  • Use the same demand and constant cost curve.
  • Profit-maximizing price and quantity lead to less consumer benefit.
  • Some consumer losses transfer to monopolist profit (transfer is neutral).
  • Total welfare decreases due to deadweight loss.

Deadweight Loss

• Trades that are socially beneficial do not occur under monopoly.
• Example: Movie theaters not lowering prices to fill seats due to overall profit considerations.
• Under competition: Price equals marginal cost, leading to efficiency.
• Under monopoly: Price is greater than marginal cost, leading to inefficiency.
• Example: GSK's Combivir priced at $12.50, marginal cost at $0.50.

Monopolies and Government Corruption

• Example: Tommy Suharto's clove monopoly in Indonesia.
• Some monopolies are purely negative with no social benefits.

Countervailing Benefits of Monopolies

• Pharmaceuticals:
  • Patents drive up prices but incentivize R&D.
  • Without patents, few incentives for developing new drugs.
  • Trade-off between static (quantity) and dynamic (innovation) efficiency.
• Other Goods:
  • Information goods, music, movies, tech, etc., have high development costs.

Policy Trade-Offs

• Lower prices today may lead to fewer innovations tomorrow.
• Douglas North’s argument about the slow technological progress due to lack of property rights.

Navigating Trade-Offs

• Government Buyouts:
  • Government buys patents and removes them, promoting competition while maintaining R&D incentives.
  • Potential downsides: higher taxes, valuation challenges, corruption.
• Prizes:
  • Upfront R&D cost payments with conditions.
  • Example: SpaceShipOne's $10 million prize.
• Price Discrimination:
  • Charging different prices to different consumers.

Conclusion

• The lecture ends with mention of exploring price discrimination in further lectures.
• Encouragement to review practice questions or proceed to next video.