hello and welcome back to our last module in monopoly we discussed in the last class
that there is considerable efficiency difference between a monopoly outcome and a competitive
outcome and we saw that the monopolist if the monopolist is able to price discriminate
it can increase its output and uh it can charge prices differently to different consumers
so a price discriminating monopolist behaviour is at least better than a monopolist who uh
charges the uniformly same uh price to all consumers and hence ends up producing less
amount of output in the economy so today today we are going to discuss uh
what happens when there is regulation of public policy that is the government intervenes so
basically the government knows that a monopoly outcome is not desirable because the full
potential amount of output is not getting produced in the market so (the mono) so the
government uh may like to control a monopoly outcome .
so what does the government do the government can go for some public policies or it can
decide to regulate the monopoly so the monopoly outcome is less desirable than the competitive
outcome since the price charged by a monopolist is more than price that gets charged in a
perfectly competitive market and a monopoly output is less than the amount of output that
could gets produced in a perfectly competitive market
so uh the first point however should uh should indicate that when we say p m and p pc they
are not they may not be strictly monopoly and strictly price uh perfect competition
outcome What we mean by the first point is whenever there is some amount of market power
with the seller the price is going to be more than competitive outcome and quantity is going
to be less than competitive outcome so that is what uh that is the difference
or that is the difference that market power brings to the market outcome so coming back
to the slides Hence the government tries to maintain market competition by regulating
anti competitive conduct by firms so hence the government strives to keep competitive
uh environment in the market so that competitive outcome is achieved in the market and consumers
get lower prices and higher amount of output in the market
so when we discussed perfect competition you may remember that i had said that although
perfect competition is a is not realistic we do not have uh absolute perfect competition
in the real world yet the competitive outcome is important because it increases output it
improves efficiency in the market it implies lower uh cost and lower prices to the consumers
it implies production at minimum cost or implies highly efficient level of production and hence
a competitive uh outcome is highly desirable for the consumers in a economy
so hence the government tries to maintain market competition by regulating anti-competitive
conduct by firms and india has the competition act of 2002 replacing the old monopoly and
restrictive trade practices act of 1969 so quickly although we are not going to uh go
into the details of the competition law or why it is there in place etc
but let me quickly just tell you this that the competition act has replaced the mrtp
act because the mrtp act according to the artp act monopoly per se was bad but now at
least it has been recognized uh that monopoly per se is not bad there are situations where
a monopoly outcome or a monopoly uh monopolistic production actually brings about better efficiency
and lower prices to the consumers how is that possible if you remember in the
last class we discussed about natural monopoly and in case of a natural monopoly the market
outcome is better than too many firms existing in the market in which case the firms basically
operate at very high cost and they cannot uh sell their products at lower prices to
the buyers so in cases of natural monopoly it makes sense
to have a single seller in the market so hence mrtp act has been abolished and we have the
competition act which basically promotes competition in the economy than trying to remove monopoly
in the economy . so uh coming to regulation regulation is basically
where the government exercises its power on the market and government basically says that
any monopoly which is operating in the market it should not exploit the consumers in the
sense that it should not uh charge too high prices especially say for say imagine a situation
where the monopolist is either a natural monopolist where the monopoly is selling something as
necessary good like say electricity so that is a natural monopoly and there if
the monopoly outcome implies very high prices and low amount of output is produced in the
market compared to the competitive outcome then it is not very desirable for the economy
secondly say for example the economy is a monopolist is selling something like medicines
its a lifesaving drug that the monopolist is able to sell because it has a patent but
at the same time it charges too high a price and so the the drug is not affordable to the
consumers so in such kinds of situations it is possible for the government to step in
and regulate the prices that the monopolist can actually charge in the market
so coming back to the slide so the government may pressurize the monopoly to produce at
the competitive level of output and charge a competitive price For natural monopolist
marginal cost is less than average total cost so price cannot be equal to marginal cost
so instead of marginal cost pricing average cost pricing is followed by the regulator
or the government subsidizes for the losses so let me let me explain this through a diagram
on the board so as i said the first the first two points are understandable uh but what
happens in case of a natural monopoly . so say in case of a natural monopoly if you
may remember from the earlier uh lectures so if you may remember from the earlier lectures
that in we said what is a natural monopoly a natural monopoly has very high fixed cost
hence for the natural monopolist the average total cost looks like the average fixed cost
and for a very huge amount till a very huge amount of output is reached marginal cost
is lower than the average uh total cost so lets so it looks something like this and
marginal cost also goes on like this so this doesnt mean to say that marginal cost
is always lower than the average cost or it doesnt mean that uh this monopolist does not
have the typical uh cost curves that we are familiar with that this is the average variable
cost the average fixed cost and average total cost and this is marginal cost so this figure
does not mean to say that we dont have a U shaped curve
what this means to say is this this goes on for a very huge amount of output till it is
produced and then the marginal cost is going to intersect the average cost at the minimum
point so for till a very huge level of output is produced this is what the cost curve looks
like uh to the producer and this is the very reason that it does not make sense to have
too many firms in the economy because the amount that will be produced will be so small
that the cost will be extremely high for the uh seller
so this is a natural monopoly case and we have the say for example we have the demand
curve this is the demand curve and we have the marginal revenue curve so we have the
demand curve and this is the marginal revenue curve so marginal cost intersecting the marginal
revenue this gives us the equilibrium output q m is produced by the monopolist and it charges
a price of p m it charges a price of p m and what is the cost to the firm
the cost is average cost at q this is the cost to the to the monopoly natural monopoly
so this is the cost to the natural monopoly so green area is the huge amount of profit
that the monopolist is incurring so the monopolist is getting a huge amount of profit equal to
the green rectangle and so the and the output is q m and price is p m
now what would have been the competitive output the competitive output would be where marginal
cost intersects the price line but before that say the government government is not
happy with this amount of output say its something a necessary good say it is electricity and
electricity production more the better in the economy for the benefit of the economy
and lower the price is it is better for the economy because its a its a necessary uh input
in most production processes so if you leave the power generation in the
hands of a monopolist and it controls output to q m charges are high high price p m this
is not at all a ideal situation which the government would like to continue or say (examp)
for example it is not electricity say for example it is something like a essential drug
and this monopolist has a patent over the drug because of which it is a monopolist and
it exercises and its cost is why is the cost like this because he has say for example he
has amortized the uh what we call sunk cost in the previous classes instead say he is
treating the cost of inventing this drug as fixed cost and he spreads it over the output
for all the periods to come so his fixed cost is very high and he decides
i am going to produce only this many amount of uh medicines in the market and charge a
very high price but say its a lifesaving drug and the government says that no you have to
produce a higher amount of output so then what happens so if the government would like
to regulate this uh regulate the production of this drug or say electricity the government
might say that you have to produce a competitive level of output
what if the government says that you have to produce a competitive level of output in
that case the production has to be where the marginal cost equals price so competitive
outcome will be let me call it q c is where marginal cost equals the demand line or the
price line Now what happens here so lot of output is produced which is q c is much higher
than q m what is the price that is that the monopoly gets to charge it charges a price
over here p c But is it feasible for the monopolist to continue
in this market if it charges a price p c No because at q c the average cost is much higher
than the price so the basically the monopolist is facing a loss so the monopolist is facing
a loss so this is his cost so the monopolist faces a loss equal to this blue rectangle
so this is the loss that the monopolist will face if he is if it is directed by the government
to produce at the competitive level of output so this is loss and this was the profit in
the earlier case so this is the loss that the monopolist has to incur and how does so
if it is a loss then the monopolist is going to just shut down his uh production and say
that i am leaving the market i cannot produce at this uh produce this amount of output and
incur such a huge loss so what are the options available to the government
what the government can do is government might say that okay i will subsidize you for these
losses so one option that is available to the government is government may pay the monopoly
this blue rectangle or cover for the losses and force the monopolist to produce at q c
and charge a price of p c but that is not again a very desirable output
because where is this subsidy going to come from it is going to come from taxes to be
paid by the people so they may not like it and its not a very desirable output so the
next thing the next option that the government usually exercises is the government says that
let it not be marginal cost pricing that is you need not keep your price equal to your
marginal cost keep your price equal to your average cost
so that is called average cost pricing and the government says that okay fine you are
uh allowed to charge a price along your average cost where average cost is equal to the price
that you charge so you can charge a price slightly higher so this is the price that
you get to charge and you produce a output which is slightly less say q c1
You produce a output slightly less but its still much higher than the monopoly output
so this is what the government can do and say that uh so instead of marginal cost pricing
average cost pricing is followed by the regulator or the government would subsidize for the
losses so this is the second option that the government has and what is the third option
the third option is the government might say that please go for price discrimination please
go for price discrimination and charge you may charge higher prices say for example peak
load pricing in case of electricity so you get to charge higher prices to say industries
who consume a lot of power and during the peak time of the day and so you can charge
high prices to them but you have to charge low prices to other consumers say households
so this is the price discrimination is one option that the government may uh give to
the monopolist so these this was our discussion about uh
regulation and thirdly what else is possible to control uh so if the government is not
government is wary about uh any any uh market being in the hands of a monopolist because
it knows that the quantity is going to be less and price is going to be more in those
situations the government may own the monopoly the government may say that let this be run
by the government so that uh public welfare is the topmost priority for this producer
and it becomes a public ownership of monopolist .
so the examples are the postal services or railways as i said in the earlier class in
india we have the postal service is a monopoly which is by the government the railway is
a monopolist so however this is public ownership is not always efficient as absence of profit
motive can result in inefficient production choices
so what happens is in case of postal service or railways the government may uh being a
extremely benevolent government may try to uh produce a competitive level of output here
and incur a lot of losses which are covered from the government revenues uh but since
it is already known that the loses will be covered so the efficient production choices
may not happen efficient production choices may not happen
and since there is no profit motive uh probably uh the efficiency is compromised in case of
a public ownership of monopoly which may not happen if the monopoly is uh monopolies has
a profit motive and is under private ownership where there the profit motive basically leads
to uh leads to the incentive to reduce cost and hence earn higher and higher profits
so this was about this this entire week we have discussed about monopoly and we have
seen that the monopolist has a the the output and price combination that the monopolist
can decide on is slightly tricky for the monopolist because he has to not only decide the level
of output he has to also decide the level of prices however the monopolist knows the
demand curve it has an understanding of the demand curve
so it respects the demand curve and after deciding on the profit maximizing level of
output it decides its price on the basis of the negatively sloping demand curve and hence
he decides on the price and output and he has to always be concerned about a negatively
sloping marginal revenue curve because when he produces an extra unit of output his price
basically goes down and there is a tradeoff between the output effect and the price effect
and we also saw that from the unlike the perfectly competitive outcome in case of monopoly outcome
there is some amount of deadweight loss or there is some efficiency loss and welfare
loss in the market and which can be corrected through price discriminating price discrimination
where efficiency level or total welfare in the economy is exactly same as the perfectly
competitive outcome but consumer surplus is completely wiped out in favour of producer
surplus so if the economy is indifferent between a
(monopo) between a producer and a consumer in that case the price distributing monopoly
outcome is exactly same as the competitive outcome and we also discussed different uh
examples of price discrimination where basically the supplier looks at price sensitivity of
different categories of buyers looks at their demand curve of different categories of buyers
at different time periods of buying the product and and this is how any supplier any producer
with some amount of market power he could price discriminate across different consumers
and since (price) uh since monopoly outcome is not as desirable as competitive outcome
we also discussed that the government may like to step in to correct the inefficiencies
of monopoly outcome or basically to improve the welfare of consumers so that consumers
get uh more supply of the output at a lower price so the government can have different
kinds of policies one is the government by law tries to create
a level playing field for all kinds of uh producers in the market so that uh a competitive
environment is created in the market to encourage more and more producers to uh produce and
sell the same uh commodities uh through the through the competition act
and secondly the government may like to regulate the monopolies in case of specially natural
monopolies the government may direct the monopolist to produce at uh produce higher level of output
than a monopoly output and charge lower level of prices this the government can achieve
through either subsidizing the monopolist or going from for average cost pricing or
asking the or allowing the monopolist to go for price discrimination
and the another option that the government has is it basically controls the monopoly
as a public ownership where uh instead of profit maximization output maximization uh
could be the objective of the uh monopoly firm where its the the objective is not profit
maximization but output maximization so that uh the necessary output is provided to all
kinds of buyers in the economy however this is criticized because uh since
profit maximization is not an objective it could lead to a lot of inefficiency in producer
in the in this kind of monopoly and the cost could be too high which finally at the end
of the day would have to be borne by the government from the taxpayers money
so in the following week we are going to discuss about uh monopolistic competition where it
will be somewhere the market will look somewhere in between perfect competition and monopoly
where there will be lot of buyers but at the same time each of the lot of sellers at the
same time each of the seller has some amount of market power because the product that he
is selling is slightly different from the products of his rivals in the market so this
monopolistic competition we are going to take up in the following week thank you