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“Alex in our final talk nin monopoly. We re going to discuss nthe costs of of monopoly. But also the potential benefits. The major costs of monopoly nis that compared competition monopoly is inefficient.
It leads to a loss in the gains nfrom trade or a deadweight loss let s remind ourselves nabout the gains from trade under competition nand then we can compare with monopoly here. We ll simplify nwith. A flat supply curve. A constant cost industry in this case.
The total gains nfrom trade. Go to consumers in this blue area right here now let s see what the total gains nfrom trade. Or total welfare is under monopoly. We choose exactly nthe same demand curve and the same constant cost curve.
We find the profit maximizing price. Nand quantity in the usual way consumers not surprisingly nget less under monopoly since the price is higher now some of what the consumers lose nis transferred to the monopolist in terms of profit. And as far nas. An economist is concerned at least someone is getting nthese gains from trade.
So the transfer is neutral. What s bad however nis that total welfare falls under monopoly nbecause no one gets this area the deadweight loss these are trades that from a social npoint of view are beneficial the demanders are willing to pay nmore than what would be the cost of producing these goods. These trades. However ndon t happen even though they re socially nbeneficial.
They don t happen because they aren t profitable nthey aren t privately beneficial think of a movie theater nthat is half empty surely. There are some people nout. There who would value watching the movie at more nthan its marginal cost about zero. So why doesn t the movie theater nlower.
The price to these people because to do so it would have nto lower the price to everyone. And that would reduce ntotal profits..
So the basic lesson is this consumers buy a good nso long as the value to them exceeds. The price under competition price nis equal to marginal cost. So consumers will buy every unit nsuch that the value to them is a greater nthan. The marginal cost that s efficient under monopoly consumers nalso buy so long as the value to them is greater than the price nbut since price is greater than marginal cost nwe get too.
Few units produced we get a loss nin the gains from trade let s remind ourselves nwhat deadweight loss looks like in practice gsk prices combivir nat 1250 per pill. The marginal cost is 50. Cents. The deadweight loss is the value nof.
The trades that do not occur. Because price is greater nthan marginal cost. Some people would be willing nand able to pay 10 per pill or 4. Or even 1 per pill nand those prices would more than cover nthe cost of producing those pills.
But those trades don t occur because they aren t nprofitable to gsk. Many monopolies around the world nare born of government corruption in indonesia. Tommy suharto. Nthe.
President s son was given the highly profitable nclove monopoly. He used the profits nfrom that monopoly to buy lamborghini not a lamborghini nhe bought the entire company these kinds of monopolies nare unredeemed. They have costs nand. No social benefits at all some.
Monopolies however ndo have countervailing benefits consider what would happen nif the us eliminated patents for pharmaceuticals competition. It s true nwould drive down the price of existing drugs to marginal cost nas happens today as soon as patents expire. Nusually within 10 to 15 years after the drug first enters nthe market but it costs about na billion dollars to bring the average new drug. Nto market in the united states and r.
D. Costs are not included nin marginal cost..
As the saying goes. Nit costs about a billion dollars to create the first pill n50 cents to create the second pill 50 cents. Is the marginal cost nthe cost of an additional pill. But to bring that first pill nto market costs about a billion dollars.
If price were quickly pushed ndown to marginal cost firms would not be able nto recover their r d. Costs and the result would be nfewer new drugs once. The drug is created nthe patent. The monopoly creates inefficiency nwe get too few units produced.
But the patent increases nthe incentive to produce the new drugs in the first place so there s a trade off more monopoly nreduces static efficiency. The quantity produced nbut can increase dynamic efficiency. The incentive nto do research and development this trade off applies nto other goods with high development cost nnot just pharmaceuticals information goods. Ngoods like music movies.
Computer programs. Nnew chemicals. New materials new technologies. These typically have high ndevelopment costs.
And low marginal cost nof production. And that suggests there may be npossible benefits to patent or copyright protection more generally for these types nof goods. There s a policy trade off which we always want nto keep in mind. That is lower prices today nmay generate fewer new ideas in the future nobel prize winning neconomic historian douglas north for example has argued n systematic property rights nin innovation up until fairly modern times nwas a major source of the slow pace nof technological change is there a better way nof navigating this trade off.
Perhaps. Suppose that the government nbought up a pharmaceutical patent for its total monopoly profits nand then they ripped the patent up competitors would enter nand drive the price of the drug down to marginal cost nthus. We would have static efficiency at the same time nsince. The government was paying firms ntheir monopoly profits.
We would still have lots nof incentive to do research and development ndynamic efficiency thus we could have nthe best of all worlds of course. There may be nsome downsides as well higher taxes to pay nfor..
The patent also have their own deadweight loss nand. It might be difficult to say exactly nhow much a patent is worth and there could be npossible corruption. Nevertheless. This is an idea nwe.
re thinking about and perhaps worth nexperimenting with prizes are another way nof navigating the trade off as with patent. Buyouts. Nthe. Idea.
Is that a firm is offered up front its r d. Costs. But the government nonly pays. The firm.
If it achieves a certain goal. And if that goal is achieved nthe technology goes into the public domain. Nand could be used by anyone spaceshipone for example. Nwon.
10. Million for being the first privately ndeveloped manned rocket capable of reaching space nand returning in a short period of time and prizes are being used nmore. Often the government set up a prize nfor better light bulbs for example nand that worked quite. Well.
There s also a third way nof navigating the trade off you may have noticed for example nthat. So far. We ve assumed that the monopolist nmust charge. The same price to everyone is this necessarily true in some cases nthe monopolist can charge different prices nto different people price discrimination.
As we ll see in the next chapter. Nand set of lectures price discrimination explains a lot nabout..
How products are priced. And it also has some costs nand. Some benefits which we ll be discussing see you then thanks narrator. If you want nto test yourself click or if you re ready to move on njust click.
ion right you realize china isn t set up yet that s pushed your calendar. Out a little bit. Yeah. You re.
Right. So that s normally not the precursor for asking for a 25. X. On your last value.
A. Ssin i definitely understand i think just given the fact that we have 14. We think we can get to raman profitability. You know we d like to put the common probability is not attractive to an investor who s looking for a big return on their money.
So what s wrong interoperability problem profitability means the business makes enough money to buy noodles for everybody burger there oh a mine come from is called a wing dinner proper billing dinner like dinner you have more protein in your deal. But you right now are price to perfection. And i can t pay a perfect price for a company that isn t perfect right now and for that reason. I m out well.
You say hey i ve made a mistake. I m doing this i m moving to china did this if ” ..
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