 In today's session, we will continue our discussion on monopoly. So, few more aspects of monopoly we have to cover in this particular segment. So, today our focus will be on that. So, if you quickly remember whatever we discussed last class is, it is all about the monopoly supply curve, why there is a absence in the absence of supply curve in the monopoly. Then we discuss about the multi plant monopolization and in this case generally the monopolist produces the entire outputs to be supplied by firm in different plants and all these plants are having a different cost function. Some plants they are operating at a lower cost and some plants they are operating at a higher cost and also we discussed that generally how the price and output decisions are made using this in case of typically in case of a multi plant monopolist and then we discuss about this how to measure the monopoly power through different methods like we have a learner index, we have cross elasticity of demand or we have the market concentration ratio or the so called HSI and then we discuss about this Rothschild index and we will discuss some more about the Rothschild index and then we will move to our next topic. And after discussing this Rothschild index we will focus today on the social cost of the monopoly power. We will take a special case where there is only buyer which is just the opposite of a monopoly that is monopoly. Then we will talk about a bilateral monopoly where there is one seller and one buyer. Then we will take about some monopoly a real world evidence and then comparison between the monopoly and the perfect competition. So, if you remember in the last class we discussed the measurement of the monopoly power. There are different methods that tells us and the value of that through the outcome this method tells us that what kind of market form it is whether it is perfect competition, whether it is monopoly or whether between the perfect competition monopoly the monopolistic competition. So, we discuss about the learner index yesterday. We discuss about the cross elasticity of demand. We discuss about the Herfindl-Hirschman index and also we just introduced the Rothschild index and today we will discuss some more about the Rothschild index. Generally, how this is if you look at how this decides what is the market power of the typical firm and on that basis that is decided whether what kind of market form it is, whether it is competitive, whether it is monopoly or whether it is between the competitive and monopoly market structure. So, here the entire focus is based on two notion one when individual firm change the price others they are not changing it. So, what should be the demand curve and in the second case when individual firms they are changing the demand curve others also they are following it and on that basis we will find out the value of the index. So, we will take two demand curve one is d d dash and second one is capital D d dash. Now, what is the difference between this capital D d dash and the small d d dash? This capital D d dash generally known as the proportional demand curve and why this is known as proportional demand curve because when one firm change the price other firm also change the price and that is the reason you will find this demand curve which in elastic because one firm change the price other firm change the price. So, the response to the change in the quantity demand generally less to the change in the price and this demand curve talks about the case where one firm change the price and others they are not changing the price. So, this generally this demand curve is known as the perceived demand curve or subjective demand curve. So, this is proportional demand curve this is subjective demand curve. Now, the essential difference between these two is one where one change one firm change the price other generally follows that and second when one firm changing others they are not following. So, when one firm is changing other firm is also changing we get a proportional demand curve when one firm may be changing others they are not changing we call it is a perceive or subjective demand curve. And why this is more elastic because since others they are not following any small change in the price of this firm generally affect the quantity demanded in a larger extent. Now, we will get the slope this is the beta and this is the alpha. Now, what is alpha? Alpha is the slope of perceived demand curve and what is beta? Beta is the slope of proportional demand curve. So, alpha is the slope of the perceived demand curve and beta is the slope of the proportional demand curve. So, now we know the basis of this Rothschild index one we have two type two kind of demand curve one demand curve is on the basis of the one demand curve is on the basis of the when one firm change the price other reacts to it also they also change the price and second is on the basis of the proportional demand curve which is on the basis of that when one firm change other change it and perceive it one when one firm change the others they are not changing to it. So, in this case if you look at two kind of demand curve depends upon the behavior of the rivals in the firm. On that basis we get we got two slope value one is with respect to the perceived demand curve and second one is with respect to the proportional demand curve. With the help of that slope value now we will try to construct the index and through the value of index we need to find out what is the market power for that typical firm. So, taking that now we will come to the index and index talks about a situation where it the value or the index value of index or the outcome index shows how far a particular firm controls the market for a particular period. So, Rothschild index is the slope of demand curve for the of firm that is perceived demand curve upon the slope of the demand curve of the industry that is the proportional demand curve and the value of index in case of pure monopoly it is equal to 1. In case of perfect monopoly it is equal to 0. So, in case of pure monopoly the Rothschild index is equal to n u t and in case of perfect competition this index is equal to 0. In between 0 to unity there are number of other firms generally you will find there into the value that ranges from 0 to 1. So, 0 talks about one extreme in case of perfect competition one talks about the other extreme in case of the in case of the pure monopoly. In between if the value of the index is in between 0 to 1 that donates some other kind of the market structure which is not strictly pure monopoly or which is not strictly pure perfect competition. So, generally this method whether it is Rothschild index whether it is learner index whether it is HHI or whether it is cross elasticity of demand generally the main motive to study this is to identify through a value identify through a index what is the market power of that specific firm. Then we will move to the next topic the social cost of monopoly power we know that all the firms they are in the market monopoly firm when they are in the different industry or the different sector they are getting benefit to the for themselves. The question comes from the what is the cost or what is the benefit that comes to the society because obviously if monopolist they are not getting profit they will be not they will not be there in the market in the long run, but what is the consequence on the society what is the consequence on the consumer group what is the benefit that comes to the society if at all they are getting it. So, monopoly power results in higher prices and lower quantity it is inelastic because there is no close substitute and they are the price maker. However, whether monopoly power make the consumer a better off or worse off for both the consumer producer that we can generally compare to the producer and consumer surplus when the competitive market or in a monopolistic market. What is the consumer surplus and producer surplus in the monopolistic market and what is the consumer surplus and producer surplus in the competitive market that gives us the difference between the whether the consumer they are better off or worse off whether the producer they are better off or worse off in case of a monopoly market structure. So, if you look at in case of perfectly competitive firm, the firm they produce at a point where marginal cost is equal to D or marginal cost is equal to the price. And how we get the price that is from the demand and supply forces of the market. Whereas, monopoly produce where marginal revenue is equal to marginal cost and getting their price from the demand curve that is price and the quantity. The loss in the consumer when going to the perfect competition to the monopoly because in case of monopoly the P is always greater than marginal cost. And this leads to a dead weight loss which generally created through the monopoly. So, in competitive market firm produce where P is equal to MC and since P is equal to MB that is willingness to buy and MC is the willingness to sell, P is equal to MC which is also equal to MB is equal to MC and this in this case the consumer get the maximum total surplus. And what happens in case of monopoly, in case of monopoly P is greater than marginal revenue or P is greater than marginal cost or we can say since we are saying this is also the marginal benefit, the marginal benefit is greater than marginal cost. So, output falls short of efficient amount and that leads to the dead weight welfare loss. So, we need to know now whether if either charging a price which is more than the charging price which is more than the marginal cost whether the consumer at all getting a consumer surplus or the because of the increase in the price the quantity demanded decreases and either that goes to the consumer pocket or not that goes to the producer pocket and in general that goes to a dead weight loss whether rather it is a rather it is a part of the profit of the consumer or part of the profit of the producer. So, now we will understand this graphically what is the dead weight loss and where generally the efficiency of the monopoly comes because if it is getting dead weight loss obviously, the monopoly is not efficient at least from the societal point of view and if the inefficiency comes, inefficiency comes basically from the dead weight loss. So, we will say what should be the ideal condition for efficiency in case of a monopoly market and also we will see inefficiency that is through the dead weight loss. So, to understand this efficient level of output or what is the efficiency of the monopoly will take the help of the marginal cost and demand. We have demand curve and what is this demand curve, this is generally the benefit or the value to the buyer, this is the marginal cost, this is the ideally this should is the efficient quantity what the monopoly should produce or the monopoly should sell to the buyers. Now if you look at this MC is nothing but this from here to here if you look at this is nothing but the cost to monopolist and here if you look at this is nothing but the value to buyer. Corresponding to this what is this, this is cost again this we can say as the cost to monopolist and here we can say again this is value to buyer because this and how we are identifying this value to buyer and cost to monopolist that is on the basis of the marginal cost and on the basis of the demand curve. Now in this segment we have two segment now this should be the efficient quantity and we have two segment with respect to this one which is before the efficient quantity and one which is beyond the efficient quantity. Now what happens in case of both this situation, so if you take this graph again this is our demand curve, this is the value to the buyer, this is the marginal cost, this is nothing but the cost to the monopolist. So, we can say that this is the efficient quantity and here this segment if you look at now what is the significance of this segment the value to buyer is greater than cost to seller because the demand curve is lying above the marginal cost curve. And what happens in this segment, in this segment the value to buyer is less than cost to seller. So, efficient quantity is this before this efficient quantity the value to buyer is greater than cost to seller. So, obviously monopolist is not going to operate here, here the value to buyer is less than cost to seller. So, if you look at this is the profitable point for the monopolist, but ideally what is the efficient quantity the efficient quantity or the efficient level of the output where the marginal cost is intersecting the demand curve. But what happens in practice does the monopolist generally follow a efficient level of output or not that we will see because there is always a debate because efficiency there is a inefficiency in the level of output and that is how the firm get the dead weight loss. So, next we will see what is the inefficient of monopoly or how generally they get the dead weight loss and how we will find out this inefficiency of the monopoly or inefficient of the monopoly output. Again we will take the help of the demand curve and the MC curve. So, this is our demand curve, this is our marginal revenue curve, this is the marginal cost curve. Now what is the monopoly quantity is this because this is we follow a marginalist principle to generally find out the monopoly output that is MC is equal to MR and corresponding to that we get the output level which is the monopoly output level and this is the monopoly price. Now what is the efficient quantity, efficient quantity is ideally corresponding to the demand curve and the marginal cost curve. So, this is efficient quantity, this is monopoly quantity. So, the difference between this monopoly quantity and the efficient quantity is generally known as the dead weight loss and this is the cost to the society in the form of the dead weight loss. Monopolyists are not operating at the efficient level of output and that leads to the fact that there is a cost to the society and what is the cost to the society, the cost to the society is in the form of the dead weight loss. And why the dead weight loss comes into picture or why there is a evidence of dead weight loss in case of monopoly because the difference between the efficient quantity and the monopoly quantity. And monopoly quantity if you look at it is always the lower quantity and higher price and efficient quantity it is one where there is a when there is a higher quantity at a lower price. So, some amount of inefficiency is there or some amount of inefficient with respect to output with respect to price is there and that generally brings a social cost or that generally imposing cost on the society. So, if you look at the profit it is not strictly the social cost because firms they are operating in the market there is to get some amount of profit at least in order to survive in the market in order to produce the product and sell it in the market or get the need of the consumer. Then from where generally the social cost comes whether it is strictly from the profit of the monopolist or from the any other sources. So, monopolist profit is not usually a social cost but transfer of surplus from consumer to producer. So, if you remember in case of consumer surplus whenever there is a increase in the price the whatever the loss in the consumers part goes to the producer. So, in this case it is not directly coming to the social cost is not directly coming from the monopoly profit or the profit is not usually a social cost but a transfer of surplus from consumer to producer generally a transfer generally a social cost because it takes out the surplus from the consumer and goes to the producer account. Profit can be social cost if extra cost are incurred to maintain it such as political lobbying or if the lack of competition lead to cost are not being minimized. So, whether it is a political lobbying or if it is a lack of competition for that if there is some extra cost are incurred then only profit is generally consider as the social cost because to get profit there is some amount of extra cost involved over here. So, social cost of monopoly is if you look at it is always likely to exceed the dead weight loss and why this generally exceed the dead weight loss may be rent sick is because firm may spend to gain monopoly power as we discussed in the previous slide because the there is some additional cost involved in the in order to get the profit and that is the reason the social cost may be exceeding the dead weight loss. So, firm may spend to gain monopoly power through lobbying through advertising and through building the access capacity. So, the incentive to engage in monopoly practices is determined by the profit to be gained. So, more profit may be the incentive is more and to get engage in the monopoly practices, but the larger the transfer from consumer to the firm the larger the social cost of monopoly. So, it is two dimension one more is the profit the firm gets into more kind of activity to become more kind of practice to become the monopolist or the so called the monopolization or the act of monopoly through which generally they try to get the market power and second how they get more profit when the transfer get produce from the transfer gets from the consumer surplus to producer surplus and this is nothing but that whenever the consumer surplus get transfer into the producer surplus there is a amount of so the cost on the society. So, the larger the transfer from the consumer to the firm the larger the social cost of the monopoly.