 Now, what is the regulation of monopoly power? May be the regulations are many, but if you look at there is interest interest legislation, which is generally for the firm who is getting into the act of the monopolization. Now, since we know that monopoly power is something which is imposing a cost on the society, there the public policy comes into picture, up to how much quantity or up to how much limit at least the monopoly power of the firm can get control. So, generally through one of it is generally the entritus legislation or entritus law which attempts to increase the competition through the legislation and whenever there is a increase in the competition generally takes away the monopoly power or market power from the firm. Then we have the price regulation and in price regulation the focus is to eliminate the dead weight loss with the monopoly and why the dead weight loss takes place because monopoly charges a higher price which reduces the demand from the consumer and when it reduces the demand from the consumer generally some unused there is a difference between the efficient and the efficient and the monopoly output which leads to dead weight loss. So, the role of the price regulation is to charge a price or to do a price ceiling which eliminate the dead weight loss of the with the monopoly. So, then we will try to understand this price regulation through this graph. So, if you look at here there are the typical monopoly understanding like we have a average revenue curve, we have a marginal revenue curve, we have average cost curve and we have marginal cost curve. So, now if you look at the graph there are two level of output. One level of output is with respect to marginal cost and marginal revenue and other level of output if you look at it is Q 1 that is on the basis of mainly on the basis of the maybe you can call it mainly on the basis of the price ceiling and when the price ceiling is done that it gives into another quantity. So, if you look at the graph now the monopolist produce Q M and charges the price P M. When the government impose a price ceiling of P 1 the firms average and marginal revenue constant and equal for P 1 at the output level Q 1. For larger output level the original average and marginal revenue curve applies and new marginal revenue curve is therefore, a dark purple line if you look at and which intersect the marginal cost curve at the point Q 1. So, corresponding to P 1 if you look at what is the new marginal revenue curve, the new marginal revenue curves comes from the price ceiling that is from P 1 and which intersect the marginal cost curve at the point Q 1. So, what is the marginal cost curve? So, marginal cost curve is this and this is at Q 1. So, this part can be called as this part can be called as the new marginal revenue curve. So, monopolist produce always Q M and the charges P M that is the price monopoly price and the output level is Q M, but when the price ceiling is imposed the price ceiling if it is imposed you will find that the quantity is Q 1 and the price is P 1 and for the larger output level the original and original average and marginal revenue curve apply, but for the new marginal revenue curve is therefore, a dark purple line typically this line this line which intersect the marginal cost curve at Q 1. So, now if the price is lowered. So, this is the P M is the price of monopoly price, P 1 is the ceiling price. When price is lower to P c at the point where marginal cost intersect the average revenue, average revenue and marginal cost intersect the average revenue here corresponding to we get a price that is P c and output increase to its maximum that is Q c. This is the output that would be produced by the competitive industry, because this level of output is generally through the competitive industry and competitive industry is one where you follow the when we find out what is the equilibrium price and quantity we follow the principle where P is equal to M c and at this point P is equal to M c corresponding to that we get the Q c level of output and we get the price which is P c that is or we can alternately call it as a P 2. Lowering the price further that is P 3 it reduces the output to Q 3 and causes shortage. So, again if you reduces the price to P 3 that will cause a shortage to the shortage that is Q 3 by Q 3 dash and marginal revenue curve when price is regulated to be no higher than P 1. Now, what is the regulation over here? If you look at the regulation here is that when we are going on decreasing the price, when we are going on decreasing the price, one is monopoly price then the ceiling price is imposed that again reduces the increase the output level from Q m to Q 1 and the price is from P m to P 1, but the ideally still there is some amount of the gap between the competitive price and the ceiling price. So, still that amount of dead weight loss is still there with the monopoly. If the price reduces below this competitive price generally this reduces the output to Q 3 and causes shortage that is Q 3 by Q 3 dash. So, this is again not profitable for the monopolist if the through regulation if you are reducing the price which is even lower than the competitive price. So, here regulation works in the form of a ceiling price that somehow increases the somehow increases the output beyond the monopoly output and reduces the price below the monopoly price. So, that somehow some amount of the dead weight loss can be controlled through the regulation. Now, we will see how the regulation work in case of a natural monopoly and what is natural monopoly here? Natural monopoly is here where the one firm generally they have generated a economies of scale and they are producing in such a cost effective manner or at a lower average cost of production that reduces the that reduces the scope for the other firms to enter into the market and operate. So, regulation when it comes to regulation in the case of the natural monopolist generally this P emcee does not work with the extensive economies of scale. So, regulated firms have very little incentive to minimize the cost. Now, what is this P by emcee? P by emcee whenever P is equal to emcee whenever we talk about this is the case of a competitive economy. So, since when it comes to regulation in the natural monopoly this P is equal to emcee does not work with the extensive economies of scale and natural economy natural monopoly is a market where there is more economies of scale and that in that generally creates a barrier for the other firms to enter. But when it comes to regulation still regulated firms have very little incentive to minimize the cost and, but when you are incentive to minimize the cost at least the some amount of the output can be controlled when it comes to the regulation. So, next we will see how the regulation work in case or how the price regulation in case of the natural monopoly and whether it affect the dead weight loss or whether it also reduces the social cost of the production. So, we have average revenue curve we have marginal revenue curve then we have average cost and why the shape of average cost is like this because this is a case of natural monopoly and the firm is operating at the lower average cost and we have marginal cost. Corresponding to this point that is emcee and emmer we get the quantity and price. So, price is P M quantity is Q M and what is the ceiling price here if you want to make it a some if you want to make or if the policy wants to do some regulation with that they will support a price where P is equal to AC or AR is equal to AC and if you do this then we get a price that is PR that is the regulated price. And what is our competitive price competitive price is that point where AR is equal to emcee. So, AR is equal to emcee is perfectly competitive price. So, we have three level of output three level of price we have monopoly output we have regulated output and we have competitive output we have monopoly price we have regulatory price and we have competitive price. So, if it is unregulated if there is no regulation then the monopoly should produce Q M and charge P M. If the price were to regulate and be the price that is the firm would lose money and go out of the business cannot cover the average cost. So, if you can ask the monopoly to produce at the price P C which is competitive price and produce the level Q C generally monopoly would go out of the business because they will lose money and it will not cover the average cost also. So, as a regulator generally the regulator will fix the price at PR giving profit as large as possible without going out of the business and that also reduces the dead weight loss associated with the associated with the monopoly. So, what is the motive behind this price regulation in case of natural monopoly? Even if the regulator is not forcing the monopolist to use the competitive price or competitive level of output at least they are giving a regulated price which is above the competitive price and below the monopoly price and if the monopolist through regulation if they have to follow it still they are getting some amount of profit and they are not out of the business and in other way it also control the dead weight loss and brings down or reduces down the social cost associated with the monopoly power or social cost associated with the monopolist profit. Now, what is the difficulty when it comes to regulation? Till the time there is a good estimation of demand and cost that generally helps in regulating the price, but there is always a difficulty in estimate the firm's cost and demand function because they change with evolving market condition. It is not that the cost and demand function is constant generally they change with evolving the market condition. So, that leads to the need of a alternative pricing technique and what is the alternative pricing technique? The rate of return regulation allows the firm to set a maximum price based on the expected rate of return that the firm will earn. So, the rate of return regulation is the alternative pricing technique in order to capture the dynamics in the demand and cost function and it allows the firm to set a maximum price based on the expected rate of return that the firm will earn. So, here the firm which they can do a prediction that what is the rate of return they will earn once they fix up the price at this level and here the rate of return method generally the firm is allowed to choose a higher price which will give them the maximum profit. But here if you look at it is still not the free of challenges, still there is challenges in this method also this rate of return, but still it has emerged as alternative pricing technique looking into the change in the demand and cost function. So, apart from this rate of return techniques government can also set up a price cap that typically the ceiling price like we discussed just now based on firm's variable cost past prices possible inflation and productivity growth. So, here when the government is setting a price cap or they are doing a price ceiling it is not maybe on the basis of the competitive price or the monopoly price rather here some other variable is taken into consideration like the what is the firm's variable cost like what is the average variable cost at what rate the scale of operation is increasing, their previous what is the price records, the possible inflation and the productivity growth and a firm is typically allowed to raise it price each year without the approval of regulatory agency by amount equal to the inflation minus expected productivity growth. So, even if the regulation is there still there is some amount of freedom to the firm when it comes to increasing the price and they can increase the price each year with the approval from the regulatory agency by amount equal to the inflation minus the expected productivity growth. So, the gap between the inflation and the expected productivity growth that is the amount what they can raise through the increase in the price that is each year and for that then do not need the regulators approval. Then we will start a new kind of market where it is the so till now if you look at it is about how many sellers or how many buyers. So, here we will specifically talk only about the more from the buyer perspective because this is a market structure or this is a form of market which is a subset of the monopoly or kind of monopoly where it is market with a single buyer. So, till the time we have the understanding that monopoly is the market where there is only single seller, but monospony is a market which there is a single buyer and a monospony is cannot purchase unlimited amount of an input at uniform price even if it is the single buyer. And here the monospony market is more into the input pricing rather than the product pricing and this monospony the evidence of monospony can be found more in the input market rather than the product market. So, this is a market with a single buyer it cannot purchase unlimited amount of an input and uniform price the price which the monospony must pay each quantity purchase given by the market supply curve for the input. So, whatever the price you pay for each quantity it has to be the market on the basis of the market supply curve for the inputs. And since the market supply curve for the most inputs are positively slope the price that monospony must pay is generally a increasing function of quantity he purchase. So, since the supply curve is positively slope the price what he is paying that is also an increasing function of quantity he purchase. And generally we take a case of the monosponyist which describe an employer with a monopolist buying power of the labor. So, here the firms employment constitute a large portion of the total employment of labor and we assume that this type of labor is relatively immobile. Farm is the wage maker in the sense that wage rate it has to pay is very directly with the number of worker its employee. So, they are not the wage taker they are the wage maker and whatever the wage rate wage rate they are paying to the labor that generally varies with the number of worker its employee. And the employment constitute a large number of large number of large portion of the total employment of the labor then only they can influence it. So, even if they are the single buyer at least they are capturing majority share of the labor market then only they can considering as they can consider as the single buyer or they can consider as the monosponyist. So, sometimes this monospoting power of the employer is virtually complete because there is one major employer in the labor market and in this case they generally enjoy the generally enjoy the maximum monospony power because they are the single buyer or they are also capturing the majority market share of the typical input. So, suppose if you look at we take a example that how generally this cost changes in case of a monospony and how we get the eclurum in case of a monospony market we will just take a small example to understand this. Suppose a farm is using three units of labor at the wage rate of 60 per head and how much total factor when they are hiring three unit of labor with a wage rate of 60 that comes to 180. If additional unit of labor is required the farm has to pay higher price for fourth unit that is rupees 80 because all the inputs or all the units of input cannot be charged in a single wage rate and up to three units of wage rate they are charging 60 per head. So, the total factor cost is 180. Then fourth unit is required he is charging 80 and it is not only 80 to the fourth unit also 80 rest 80 to the rest of the units also rest units of labor that increases the total cost from 20 each for each unit of labor which increases the total factor cost to rupees 320 because this is now 80 rupees plus 4 unit. So, that comes to rupees 320 for the total factor cost. Now, what is the marginal factor cost? The marginal factor cost if you look at here it exceeds the price of labor because price of labor is 60 and marginal factor cost at this stage is from third unit to fourth unit is more than the price of the labor. So, now we will see how we take this example with the help this total factor cost to marginal factor cost with the graphical explanation and how generally monasponim reach the equilibrium. So, this is the marginal factor cost for labor this is supply for labor this is marginal revenue product for labor corresponding to this we get number of labor here we get another labor of that is according to the perfect competitive we get a wage rate that is with respect to A that is this is W star sorry this is yes this is W star this is W dash and this is W star. Now, what is marginal factor cost for labor here this is each increase in the quantity of the factor the firm use because this is a marginal factor cost with respect to the labor. Now, what is MRPL? MRPL is the demand curve for the labor and how we get the marginal product for labor that is MPL multiplied by price that gives us the marginal revenue product for labor supply curve is the supply curve for the labor. Now, what is the profit maximizing quantity? Profit maximizing quantity is the intersection of the marginal revenue product and marginal factor cost for labor. So, that gives us L star worker and pay wage rate that is W star. Now, labor receivable wage which is less than the marginal product. So, labor receivable wage which is less than the marginal product and how we find this equilibrium? We find this equilibrium through this wage rate that is W star and labor that is L star. Now, what is this L dash? L dash is ideally what is through perfect competitive it is a case of a perfect competitive then the equilibrium can be found with the help of supply of labor and demand for labor. So, corresponding to that we get a level that is A which is W dash is the wage rate and L dash is the amount of labor. So, if it is a case of a if it is a case of a perfect competitive market then ideally this should be the total amount of labor and this should be the wage rate. Any wage rate below this will generally bring the difference in the supply and demand for labor. The supply of labor will be less because this wage rate is not profitable or not beneficial from them and that is the reason if you look at the supply of labor is less than demand for labor if any wage rate below this. So, this can be called as W star dash or simply W double dash which is the wage rate which is less than the W star which is the monasponist wage rate and this is the perfect competitive wage rate. Any wage rate below that will generally brings down the labor supply and there is a gap between the labor demand and labor supply. So, in case of monaspony equilibrium we find the equilibrium at this point where M F C L generally the marginal factor cost of labor is intersecting the marginal revenue product for the labor and we get the output that is L star is the labor output and W star is the wage that is given to them and generally labor receives a wage which is less than the marginal product for the labor. Now, we will say what is the monaspony power like the way we analyze there is a market power for the monopolist whether there is any market power for the monasponist. So, monaspony power is the ability of the buyers to affect the price of the goods and pay less than the price that would exist in a competitive market. So, this is again a power to give a lower price than whatever existing in the market. So, through this and when this will happen when suppose you take a case of a place where there is only one industry existing and they are considered to the with the largest employer in this particular locality. So, if whatever the price they are charging the labor they has to accept it otherwise there is no other way out to get the employment. So, this is the case where the firm or firm where the plants they have a market share because they can influence the price and they can pay wage rate which is lower than the existing wage rate in the market. So, monaspony power is the ability of the buyers to affect the price of the good and pay less the price that would exist in a competitive market. Now, on what are the factor on which the degree of monaspony power generally depends? First one is the number of buyers, the fewer the number of buyers the less elastic the supply and the greater is the monaspony power. Interaction among the buyers the less the buyers compete the greater the monaspony power and elasticity of market supply extent to which the price is marked down below the mv depends upon the elasticity of supply facing buyer. And if the supply is very elastic markdown will be small the more elastic the supply the more is the monaspony power. Now, we will if you look at what is the social cost of the monopoly power. Here if you look at again we have again we have one to understand the demand another to understand the supply. Here if you look at the shaded rectangle and the triangle source change in the buyers and sellers surplus when moving from competitive price to the competitive price and quantity. So, this is what this triangle B is nothing, but the change in the buyers and sellers surplus or we can call it this is the dead weight loss because this neither goes to the neither goes to the buyers or nor goes to the sellers. And why we get this amount this triangle as the dead weight loss because of the competitive price that is PC and the QC to the monaspony price and quantity that is PM and QM. So, the difference between the PM that is the monopolist price and competitive price PC and the quantity that is quantity of monaspony and quantity of perfect competitive that gives us the dead weight loss. And because both price and quantity are lower there is an increase in the buyer surplus given the amount A by B. So, some amount of buyer surplus is there, but still it is not going to the society rather it is coming to the as a dead weight loss because part of it is going to buyer and some amount is still consider as the dead weight loss. So, what is the social cost of monaspony? The producer surplus fall by A plus C and there is a dead weight loss given by the triangle BC and it is more if you look at it is not B is the dead weight loss also the B plus C is the dead weight loss because of the monaspony power. So, we will continue our discussion on monopoly few more kind of monopoly like a typical example of bilateral monopoly. Then we will do a comparative assessment between the monopoly and perfect competition and we will talk about a monopolistic form of market which is a ideal mix of both the perfect competitive market structure and monopoly somewhere lie between the monopolist monopoly market structure and the perfect competitive market structure in the next session.