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M07.L04 — Monopoly vs Perfect Competition: Deadweight Loss

Module: Module 07 — Monopoly Lesson: L04 of 06 Duration: ~30 minutes Level: Introductory Provenance: OpenStax Principles of Microeconomics 3e | Principles of Microeconomics (Curtis and Irvine)

Learning Objective

Compare monopoly and perfect competition outcomes and identify deadweight loss.

Comparing Market Structures

Perfect Competition (PC) vs Monopoly:

  • Output: Monopoly produces less (Qm < Qpc)
  • Price: Monopoly charges more (Pm > Ppc)
  • Efficiency: PC is allocatively efficient (P=MC); monopoly is not (P>MC)
  • Profit: PC firms earn zero economic profit long-run; monopolies can earn persistent profits

The deadweight loss triangle represents the net loss to society from monopoly power - the value of the transactions that would occur under competition but don't under monopoly.

Worked Example

Australian Domestic Airline Market

  1. Competitive scenario (pre-1990s):
  2. Multiple carriers on major routes
  3. Prices close to marginal cost ($100 SYD-MEL)

  4. Frequent price wars

  5. Monopoly scenario (Qantas dominance post-Ansett collapse):

  6. Single carrier on many routes
  7. Prices rise to $180
  8. Output falls by 30%
  9. Deadweight loss = area between Qpc and Qm, above MC, below demand

Common Misconception

"Natural monopolies should always be broken up"

While monopolies create deadweight loss, breaking up natural monopolies (like electricity grids) could raise costs through duplication. The tradeoff is between allocative efficiency (competition) and productive efficiency (single producer).

Key Takeaways

  • Monopolies produce less and charge more than competitive markets
  • Deadweight loss represents lost gains from trade
  • Allocative inefficiency occurs because P > MC
  • Natural monopolies present a policy dilemma
  • Australian examples include airports and utilities

Practice

  1. Draw the DWL triangle for our airline example
  2. Why doesn't breaking up a natural monopoly necessarily improve welfare?
  3. How might privatizing a government monopoly affect DWL?

Further Resources

Provenance: OpenStax Principles of Microeconomics 3e | Principles of Microeconomics (Curtis and Irvine)