9.9

• A monopoly is a market structure where a single firm dominates the market. It can produce less output and charge higher prices compared to a perfectly competitive industry, potentially leading to inefficiencies.
• Schumpeter’s argument, suggests that monopolies can be innovative. This is because they have greater resources and profits to invest in research and development (R&D), driving technical advances that lower production costs or develop new products. This can lead to lower prices and increased output over time.
• Incentives for R&D:

  • Monopolies may have more incentive to invest in R&D than competitive firms. Competitive firms typically face smaller profit margins, meaning they may have less motivation and fewer resources to innovate.
  • A monopoly with high and steady profits can fund R&D more easily and pursue long-term innovations.
• 1. Schumpeter’s Hypothesis:

  • Schumpeter believed that large monopolistic firms are likely to innovate more because they can afford to take risks with R&D.
  • The patent system is one way this plays out in reality. Patents give firms temporary monopolies on new technologies, encouraging them to innovate by offering a reward in the form of exclusive market control for a period.
• Lipitor’s patent gave Pfizer a monopoly from 1996 to 2011, allowing it to generate over $100 billion in revenue. When the patent expired, competition entered the market, causing Pfizer’s Lipitor sales to decline significantly.

  This case shows:

  • Monopoly profits are often temporary because patents eventually expire, and competition can reduce a firm's market power after the expiration.
  • Innovation via patents can lead to short-term monopolies, but the long-term market becomes competitive again.
• • After R&D or technical advances, the firm experiences lower average costs, leading to a downward shift in the cost curve.
  • The monopoly, post-innovation, can charge a lower price and produce higher output, benefiting consumers with lower prices and increased availability of the product.
• Monopolies can both harm consumers by charging higher prices and restricting output in the short run but may benefit society in the long run by driving technical advancements.
• Patents incentivize monopolies to invest in innovation by temporarily giving them control over the market for new products or technologies.
• However, competition is necessary after patents expire to lower prices and increase output, showing the balance between monopoly and competition.
• Demand Curve (DD):

  • This downward-sloping line shows the relationship between price and quantity demanded.
  • As price decreases, the quantity demanded increases, which is typical of most markets.
• Marginal Revenue Curve (MR):

  • This curve is below the demand curve because, for a monopolist, marginal revenue decreases faster than the price.
  • This is due to the fact that to sell more units, the monopolist must lower the price on all previous units as well, meaning the extra revenue from each additional unit sold is less than the price charged for that unit.
• Long-run Marginal Cost Curve (LMC):

  • This curve represents the additional cost to the monopolist of producing one more unit of the good.
  • Notice that it is upward-sloping, reflecting the eventual increase in costs as production expands.
• Long-run Average Cost Curve (LAC):

  • This curve shows the average cost per unit of output, which falls initially due to economies of scale and then starts rising after a certain point (due to diseconomies of scale).
• Equilibrium Under Private Monopoly (Point A):

  • The monopolist sets output where MR = MC, which happens at point A.
  • The monopolist produces QM and charges a price of PM.
  • At this point, the monopolist maximizes its profits, as the additional revenue from producing one more unit exactly equals the additional cost.
• • Socially Optimal Output and Price (Point E’):
  • The socially efficient outcome (the one that maximizes total welfare) occurs where LMC = Demand, at point E’.
  • At this point, the monopolist would produce Q’ and charge PC.
  • However, because the monopolist is profit-maximizing, it will produce less than this socially optimal amount (at QM) and charge a higher price (at PM).
• • The deadweight loss (DWL) is the loss of total surplus (consumer and producer surplus) that occurs because the monopolist produces less than the socially optimal quantity.
  • The triangle labeled AEE’ represents the deadweight loss. It shows the loss in efficiency because the monopolist restricts output and charges a higher price, leading to fewer units being produced and consumed than in a perfectly competitive market.