Page 497 - Microeconomics, Fourth Edition

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11.6 WHY DO MONOPOLY MARKETS EXIST? 471
MONOPOLY DEADWEIGHT LOSS

How does the difference between the monopoly and competitive equilibria affect
economic benefits in this market? In Figure 11.16, the consumer surplus with a profit-
maximizing monopolist is area A. The monopolist’s producer surplus is the accumu-
lation of the difference between the monopolist’s price and the marginal cost of each
unit it produces. This corresponds to areas B E H. Thus, the net economic ben-
efit at the monopoly equilibrium is A B E H. In the perfectly competitive mar-
ket, consumer surplus is areas A B F and producer surplus is areas E G H.
Net economic benefit under perfect competition is thus A B E F G H.
The table in Figure 11.16 compares the net benefits under monopoly and perfect
competition. It shows that the net economic benefit under perfect competition ex-
ceeds the net economic benefit under monopoly by an amount equal to areas F G.
This difference is the deadweight loss due to monopoly. This deadweight loss is deadweight loss due
analogous to the deadweight losses you saw in Chapter 10. It represents the difference to monopoly The dif-
between the net economic benefit that would arise if the market were perfectly com- ference between the net
petitive and the net benefit attained with the monopoly. In Figure 11.16, the monopoly economic benefit that
deadweight loss arises because the monopolist does not produce units of output be- would arise if the market
were perfectly competitive
tween 600 and 1,000 for which consumers’ marginal willingness to pay (represented and the net economic bene-
by the demand curve) exceeds marginal cost. Production of these units enhances total fit attained at the monopoly
economic benefit, but production also reduces the monopolist’s profit. Therefore, the equilibrium.
monopolist does not produce them.

RENT-SEEKING ACTIVITIES
The table in Figure 11.16 might understate the monopoly deadweight loss. Because a
monopolist often earns positive economic profits, you might expect that firms would
have an incentive to acquire monopoly power. For example, during the 1990s, cable
television companies spent millions lobbying Congress to preserve regulations that
limit the ability of satellite broadcasters to compete with traditional cable service.
Activities aimed at creating or preserving monopoly power are called rent-seeking rent-seeking activities
activities. Expenditures on rent-seeking activities can represent an important social Activities aimed at creating
cost of monopoly that the table does not reflect. or preserving monopoly
The incentive to engage in rent-seeking activities gets stronger the greater the power.
potential monopoly profit (areas B E H in Figure 11.16). Indeed, the monopoly
profit represents the maximum a firm would be willing to spend on rent-seeking activ-
ities to protect its monopoly. If a firm spent this maximum amount, the deadweight loss
from monopoly would be the sum of monopoly profit B E H and the traditional
deadweight loss F G. If the monopolist engages in rent-seeking activities to acquire
or preserve its monopoly position, F G represents a lower bound on the deadweight
loss from monopoly, while B E F G H represents an upper bound.

We have studied how a profit-maximizing monopolist determines its quantity and 11.6
price. And because its quantity and price differ from the perfectly competitive equilib- WHY DO
rium, we have seen that the monopoly equilibrium creates a deadweight loss. But how
do monopolies arise in the first place? Why, for example, does BSkyB have a monop- MONOPOLY
oly on satellite broadcasting in the United Kingdom? Why does Microsoft Windows MARKETS
have nearly 100 percent of the market for personal computer operating systems? In this EXIST?
section we explore why monopoly markets might arise. To do so, we first study the con-
cept of a natural monopoly. Then, we explore the notion of barriers to entry.