[Script Info] Title: [Events] Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text Dialogue: 0,0:00:00.00,0:00:05.18,Default,,0000,0000,0000,,♪ [music] ♪ Dialogue: 0,0:00:09.21,0:00:11.19,Default,,0000,0000,0000,,- [Alex] In our final talk\Nin monopoly, Dialogue: 0,0:00:11.19,0:00:13.51,Default,,0000,0000,0000,,we're going to discuss\Nthe costs of monopoly, Dialogue: 0,0:00:13.51,0:00:16.46,Default,,0000,0000,0000,,but also the potential benefits. Dialogue: 0,0:00:21.20,0:00:24.63,Default,,0000,0000,0000,,The major costs of monopoly\Nis that compared to competition, Dialogue: 0,0:00:24.63,0:00:26.49,Default,,0000,0000,0000,,monopoly is inefficient. Dialogue: 0,0:00:26.49,0:00:30.37,Default,,0000,0000,0000,,It leads to a loss in the gains\Nfrom trade or a deadweight loss. Dialogue: 0,0:00:30.37,0:00:32.76,Default,,0000,0000,0000,,Let's remind ourselves\Nabout the gains from trade Dialogue: 0,0:00:32.76,0:00:35.35,Default,,0000,0000,0000,,under competition\Nand then we can compare Dialogue: 0,0:00:35.35,0:00:36.76,Default,,0000,0000,0000,,with monopoly. Dialogue: 0,0:00:36.76,0:00:39.23,Default,,0000,0000,0000,,Here we'll simplify\Nwith a flat supply curve, Dialogue: 0,0:00:39.23,0:00:41.41,Default,,0000,0000,0000,,a constant cost industry. Dialogue: 0,0:00:41.41,0:00:44.68,Default,,0000,0000,0000,,In this case the total gains\Nfrom trade go to consumers Dialogue: 0,0:00:44.68,0:00:46.92,Default,,0000,0000,0000,,in this blue area right here. Dialogue: 0,0:00:46.92,0:00:49.87,Default,,0000,0000,0000,,Now let's see what the total gains\Nfrom trade or total welfare Dialogue: 0,0:00:49.87,0:00:51.48,Default,,0000,0000,0000,,is under monopoly. Dialogue: 0,0:00:51.48,0:00:54.01,Default,,0000,0000,0000,,We choose exactly\Nthe same demand curve Dialogue: 0,0:00:54.01,0:00:56.69,Default,,0000,0000,0000,,and the same constant cost curve. Dialogue: 0,0:00:56.69,0:01:00.89,Default,,0000,0000,0000,,We find the profit maximizing price\Nand quantity in the usual way. Dialogue: 0,0:01:01.67,0:01:05.67,Default,,0000,0000,0000,,Consumers, not surprisingly,\Nget less under monopoly Dialogue: 0,0:01:05.67,0:01:07.68,Default,,0000,0000,0000,,since the price is higher. Dialogue: 0,0:01:08.00,0:01:13.28,Default,,0000,0000,0000,,Now some of what the consumers lose\Nis transferred to the monopolist Dialogue: 0,0:01:13.28,0:01:16.92,Default,,0000,0000,0000,,in terms of profit, and as far\Nas an economist is concerned, Dialogue: 0,0:01:16.92,0:01:19.74,Default,,0000,0000,0000,,at least someone is getting\Nthese gains from trade. Dialogue: 0,0:01:19.75,0:01:21.85,Default,,0000,0000,0000,,So the transfer is neutral. Dialogue: 0,0:01:22.78,0:01:26.58,Default,,0000,0000,0000,,What's bad however,\Nis that total welfare falls Dialogue: 0,0:01:26.58,0:01:30.36,Default,,0000,0000,0000,,under monopoly\Nbecause no one gets this area, Dialogue: 0,0:01:30.36,0:01:32.30,Default,,0000,0000,0000,,the deadweight loss. Dialogue: 0,0:01:32.30,0:01:36.56,Default,,0000,0000,0000,,These are trades that from a social\Npoint of view are beneficial. Dialogue: 0,0:01:36.56,0:01:41.56,Default,,0000,0000,0000,,The demanders are willing to pay\Nmore than what would be the cost Dialogue: 0,0:01:41.56,0:01:43.50,Default,,0000,0000,0000,,of producing these goods. Dialogue: 0,0:01:44.29,0:01:47.23,Default,,0000,0000,0000,,These trades, however,\Ndon't happen. Dialogue: 0,0:01:47.97,0:01:50.89,Default,,0000,0000,0000,,Even though they're socially\Nbeneficial they don't happen Dialogue: 0,0:01:50.89,0:01:55.19,Default,,0000,0000,0000,,because they aren't profitable,\Nthey aren't privately beneficial. Dialogue: 0,0:01:55.57,0:01:57.72,Default,,0000,0000,0000,,Think of a movie theater\Nthat is half empty. Dialogue: 0,0:01:58.11,0:02:00.58,Default,,0000,0000,0000,,Surely there are some people\Nout there who would value Dialogue: 0,0:02:00.58,0:02:04.82,Default,,0000,0000,0000,,watching the movie at more\Nthan its marginal cost, about zero. Dialogue: 0,0:02:05.24,0:02:08.41,Default,,0000,0000,0000,,So why doesn't the movie theater\Nlower the price to these people? Dialogue: 0,0:02:09.09,0:02:13.45,Default,,0000,0000,0000,,Because to do so it would have\Nto lower the price to everyone Dialogue: 0,0:02:13.45,0:02:15.96,Default,,0000,0000,0000,,and that would reduce\Ntotal profits. Dialogue: 0,0:02:16.82,0:02:18.84,Default,,0000,0000,0000,,So the basic lesson is this. Dialogue: 0,0:02:20.44,0:02:23.44,Default,,0000,0000,0000,,Consumers buy a good\Nso long as the value to them Dialogue: 0,0:02:23.44,0:02:25.17,Default,,0000,0000,0000,,exceeds the price. Dialogue: 0,0:02:25.42,0:02:28.54,Default,,0000,0000,0000,,Under competition, price\Nis equal to marginal cost, Dialogue: 0,0:02:28.98,0:02:33.01,Default,,0000,0000,0000,,so consumers will buy every unit\Nsuch that the value to them Dialogue: 0,0:02:33.01,0:02:35.74,Default,,0000,0000,0000,,is a greater\Nthan the marginal cost. Dialogue: 0,0:02:36.20,0:02:37.89,Default,,0000,0000,0000,,That's efficient. Dialogue: 0,0:02:37.89,0:02:41.42,Default,,0000,0000,0000,,Under monopoly, consumers\Nalso buy so long as the value Dialogue: 0,0:02:41.42,0:02:45.48,Default,,0000,0000,0000,,to them is greater than the price,\Nbut since price is greater Dialogue: 0,0:02:45.48,0:02:49.96,Default,,0000,0000,0000,,than marginal cost,\Nwe get too few units produced. Dialogue: 0,0:02:50.38,0:02:52.74,Default,,0000,0000,0000,,We get a loss\Nin the gains from trade. Dialogue: 0,0:02:53.76,0:02:55.66,Default,,0000,0000,0000,,Let's remind ourselves\Nwhat deadweight loss Dialogue: 0,0:02:55.66,0:02:57.41,Default,,0000,0000,0000,,looks like in practice. Dialogue: 0,0:02:57.41,0:03:00.83,Default,,0000,0000,0000,,GSK prices Combivir\Nat $12.50 per pill. Dialogue: 0,0:03:01.15,0:03:03.76,Default,,0000,0000,0000,,The marginal cost is 50 cents. Dialogue: 0,0:03:03.76,0:03:08.31,Default,,0000,0000,0000,,The deadweight loss is the value\Nof the trades that do not occur Dialogue: 0,0:03:08.31,0:03:11.23,Default,,0000,0000,0000,,because price is greater\Nthan marginal cost. Dialogue: 0,0:03:11.23,0:03:14.77,Default,,0000,0000,0000,,Some people would be willing\Nand able to pay $10 per pill Dialogue: 0,0:03:14.77,0:03:19.09,Default,,0000,0000,0000,,or $4, or even $1 per pill\Nand those prices Dialogue: 0,0:03:19.09,0:03:23.10,Default,,0000,0000,0000,,would more than cover\Nthe cost of producing those pills. Dialogue: 0,0:03:23.80,0:03:25.90,Default,,0000,0000,0000,,But those trades don't occur Dialogue: 0,0:03:25.90,0:03:29.11,Default,,0000,0000,0000,,because they aren't\Nprofitable to GSK. Dialogue: 0,0:03:29.48,0:03:33.65,Default,,0000,0000,0000,,Many monopolies around the world\Nare born of government corruption. Dialogue: 0,0:03:33.65,0:03:37.03,Default,,0000,0000,0000,,In Indonesia, Tommy Suharto,\Nthe president's son, Dialogue: 0,0:03:37.03,0:03:40.64,Default,,0000,0000,0000,,was given the highly profitable\Nclove monopoly. Dialogue: 0,0:03:40.64,0:03:42.26,Default,,0000,0000,0000,,He used the profits\Nfrom that monopoly Dialogue: 0,0:03:42.26,0:03:43.85,Default,,0000,0000,0000,,to buy Lamborghini. Dialogue: 0,0:03:43.85,0:03:47.46,Default,,0000,0000,0000,,Not a Lamborghini --\Nhe bought the entire company. Dialogue: 0,0:03:47.95,0:03:50.80,Default,,0000,0000,0000,,These kinds of monopolies\Nare unredeemed. Dialogue: 0,0:03:50.80,0:03:53.67,Default,,0000,0000,0000,,They have costs\Nand no social benefits at all. Dialogue: 0,0:03:54.72,0:03:58.56,Default,,0000,0000,0000,,Some monopolies however,\Ndo have countervailing benefits. Dialogue: 0,0:03:59.02,0:04:01.88,Default,,0000,0000,0000,,Consider what would happen\Nif the U.S. eliminated patents Dialogue: 0,0:04:01.88,0:04:03.63,Default,,0000,0000,0000,,for pharmaceuticals. Dialogue: 0,0:04:03.63,0:04:06.35,Default,,0000,0000,0000,,Competition, it's true,\Nwould drive down the price Dialogue: 0,0:04:06.35,0:04:10.93,Default,,0000,0000,0000,,of existing drugs to marginal cost,\Nas happens today Dialogue: 0,0:04:10.93,0:04:14.69,Default,,0000,0000,0000,,as soon as patents expire,\Nusually within 10 to 15 years Dialogue: 0,0:04:14.69,0:04:17.14,Default,,0000,0000,0000,,after the drug first enters\Nthe market. Dialogue: 0,0:04:17.70,0:04:20.84,Default,,0000,0000,0000,,But it costs about\Na billion dollars Dialogue: 0,0:04:20.84,0:04:24.82,Default,,0000,0000,0000,,to bring the average new drug\Nto market in the United States, Dialogue: 0,0:04:24.82,0:04:29.27,Default,,0000,0000,0000,,and R&D costs are not included\Nin marginal cost. Dialogue: 0,0:04:29.90,0:04:33.48,Default,,0000,0000,0000,,As the saying goes,\Nit costs about a billion dollars Dialogue: 0,0:04:33.48,0:04:38.33,Default,,0000,0000,0000,,to create the first pill,\N50 cents to create the second pill. Dialogue: 0,0:04:39.07,0:04:42.81,Default,,0000,0000,0000,,50 cents is the marginal cost,\Nthe cost of an additional pill, Dialogue: 0,0:04:42.81,0:04:45.12,Default,,0000,0000,0000,,but to bring that first pill\Nto market costs Dialogue: 0,0:04:45.12,0:04:47.36,Default,,0000,0000,0000,,about a billion dollars. Dialogue: 0,0:04:47.74,0:04:52.10,Default,,0000,0000,0000,,If price were quickly pushed\Ndown to marginal cost, Dialogue: 0,0:04:52.10,0:04:56.06,Default,,0000,0000,0000,,firms would not be able\Nto recover their R&D costs, Dialogue: 0,0:04:56.40,0:04:59.28,Default,,0000,0000,0000,,and the result would be\Nfewer new drugs. Dialogue: 0,0:05:00.47,0:05:03.61,Default,,0000,0000,0000,,Once the drug is created,\Nthe patent, the monopoly, Dialogue: 0,0:05:03.61,0:05:06.90,Default,,0000,0000,0000,,creates inefficiency,\Nwe get too few units produced. Dialogue: 0,0:05:07.35,0:05:10.82,Default,,0000,0000,0000,,But the patent increases\Nthe incentive to produce Dialogue: 0,0:05:10.82,0:05:12.99,Default,,0000,0000,0000,,the new drugs in the first place. Dialogue: 0,0:05:13.47,0:05:14.94,Default,,0000,0000,0000,,So there's a trade-off. Dialogue: 0,0:05:15.16,0:05:17.88,Default,,0000,0000,0000,,More monopoly\Nreduces static efficiency, Dialogue: 0,0:05:17.88,0:05:20.42,Default,,0000,0000,0000,,the quantity produced,\Nbut can increase Dialogue: 0,0:05:20.42,0:05:25.06,Default,,0000,0000,0000,,dynamic efficiency, the incentive\Nto do research and development. Dialogue: 0,0:05:26.91,0:05:29.33,Default,,0000,0000,0000,,This trade-off applies\Nto other goods Dialogue: 0,0:05:29.33,0:05:32.09,Default,,0000,0000,0000,,with high development cost,\Nnot just pharmaceuticals. Dialogue: 0,0:05:32.46,0:05:35.38,Default,,0000,0000,0000,,Information goods,\Ngoods like music, movies, Dialogue: 0,0:05:35.38,0:05:37.95,Default,,0000,0000,0000,,computer programs,\Nnew chemicals, new materials, Dialogue: 0,0:05:37.95,0:05:39.45,Default,,0000,0000,0000,,new technologies. Dialogue: 0,0:05:39.45,0:05:42.25,Default,,0000,0000,0000,,These typically have high\Ndevelopment costs Dialogue: 0,0:05:42.25,0:05:44.85,Default,,0000,0000,0000,,and low marginal cost\Nof production. Dialogue: 0,0:05:44.85,0:05:48.18,Default,,0000,0000,0000,,And that suggests there may be\Npossible benefits to patent Dialogue: 0,0:05:48.18,0:05:50.26,Default,,0000,0000,0000,,or copyright protection. Dialogue: 0,0:05:50.67,0:05:54.35,Default,,0000,0000,0000,,More generally for these types\Nof goods there's a policy trade-off Dialogue: 0,0:05:54.35,0:05:56.80,Default,,0000,0000,0000,,which we always want\Nto keep in mind. Dialogue: 0,0:05:56.80,0:06:01.66,Default,,0000,0000,0000,,That is lower prices today\Nmay generate fewer new ideas Dialogue: 0,0:06:01.66,0:06:03.39,Default,,0000,0000,0000,,in the future. Dialogue: 0,0:06:05.17,0:06:08.30,Default,,0000,0000,0000,,Nobel prize winning\Neconomic historian, Douglas North, Dialogue: 0,0:06:08.30,0:06:11.92,Default,,0000,0000,0000,,for example, has argued,\N"The failure to develop Dialogue: 0,0:06:11.92,0:06:14.41,Default,,0000,0000,0000,,systematic property rights\Nin innovation Dialogue: 0,0:06:14.41,0:06:17.65,Default,,0000,0000,0000,,up until fairly modern times\Nwas a major source Dialogue: 0,0:06:17.65,0:06:20.73,Default,,0000,0000,0000,,of the slow pace\Nof technological change." Dialogue: 0,0:06:21.73,0:06:24.89,Default,,0000,0000,0000,,Is there a better way\Nof navigating this trade-off? Dialogue: 0,0:06:24.96,0:06:26.46,Default,,0000,0000,0000,,Perhaps. Dialogue: 0,0:06:26.46,0:06:29.88,Default,,0000,0000,0000,,Suppose that the government\Nbought up a pharmaceutical patent Dialogue: 0,0:06:29.88,0:06:34.42,Default,,0000,0000,0000,,for its total monopoly profits\Nand then they ripped the patent up. Dialogue: 0,0:06:34.98,0:06:38.57,Default,,0000,0000,0000,,Competitors would enter\Nand drive the price of the drug Dialogue: 0,0:06:38.57,0:06:40.95,Default,,0000,0000,0000,,down to marginal cost,\Nthus we would have Dialogue: 0,0:06:40.95,0:06:42.68,Default,,0000,0000,0000,,static efficiency. Dialogue: 0,0:06:42.68,0:06:44.62,Default,,0000,0000,0000,,At the same time,\Nsince the government Dialogue: 0,0:06:44.62,0:06:47.84,Default,,0000,0000,0000,,was paying firms\Ntheir monopoly profits, Dialogue: 0,0:06:47.84,0:06:50.66,Default,,0000,0000,0000,,we would still have lots\Nof incentive to do research Dialogue: 0,0:06:50.66,0:06:53.42,Default,,0000,0000,0000,,and development --\Ndynamic efficiency. Dialogue: 0,0:06:53.42,0:06:55.89,Default,,0000,0000,0000,,Thus we could have\Nthe best of all worlds. Dialogue: 0,0:06:55.89,0:06:58.92,Default,,0000,0000,0000,,Of course, there may be\Nsome downsides as well. Dialogue: 0,0:06:58.92,0:07:01.44,Default,,0000,0000,0000,,Higher taxes to pay\Nfor the patent also have Dialogue: 0,0:07:01.44,0:07:03.89,Default,,0000,0000,0000,,their own deadweight loss,\Nand it might be difficult Dialogue: 0,0:07:03.89,0:07:06.84,Default,,0000,0000,0000,,to say exactly\Nhow much a patent is worth. Dialogue: 0,0:07:07.11,0:07:09.35,Default,,0000,0000,0000,,And there could be\Npossible corruption. Dialogue: 0,0:07:09.35,0:07:11.96,Default,,0000,0000,0000,,Nevertheless, this is an idea\Nwe're thinking about, Dialogue: 0,0:07:11.96,0:07:14.24,Default,,0000,0000,0000,,and perhaps worth\Nexperimenting with. Dialogue: 0,0:07:15.28,0:07:18.17,Default,,0000,0000,0000,,Prizes are another way\Nof navigating the trade-off. Dialogue: 0,0:07:18.50,0:07:21.09,Default,,0000,0000,0000,,As with patent buyouts,\Nthe idea is that a firm Dialogue: 0,0:07:21.09,0:07:24.23,Default,,0000,0000,0000,,is offered up front its R&D costs. Dialogue: 0,0:07:24.33,0:07:27.13,Default,,0000,0000,0000,,But the government\Nonly pays the firm Dialogue: 0,0:07:27.13,0:07:29.27,Default,,0000,0000,0000,,if it achieves a certain goal. Dialogue: 0,0:07:29.27,0:07:31.89,Default,,0000,0000,0000,,And if that goal is achieved,\Nthe technology goes Dialogue: 0,0:07:31.89,0:07:35.02,Default,,0000,0000,0000,,into the public domain\Nand could be used by anyone. Dialogue: 0,0:07:35.51,0:07:38.06,Default,,0000,0000,0000,,SpaceShipOne, for example,\Nwon $10 million Dialogue: 0,0:07:38.06,0:07:41.74,Default,,0000,0000,0000,,for being the first privately\Ndeveloped manned rocket Dialogue: 0,0:07:41.74,0:07:43.66,Default,,0000,0000,0000,,capable of reaching space\Nand returning Dialogue: 0,0:07:43.66,0:07:45.57,Default,,0000,0000,0000,,in a short period of time. Dialogue: 0,0:07:45.57,0:07:47.91,Default,,0000,0000,0000,,And prizes are being used\Nmore often. Dialogue: 0,0:07:47.91,0:07:50.19,Default,,0000,0000,0000,,The government set up a prize\Nfor better light bulbs, Dialogue: 0,0:07:50.19,0:07:53.01,Default,,0000,0000,0000,,for example,\Nand that worked quite well. Dialogue: 0,0:07:53.68,0:07:56.56,Default,,0000,0000,0000,,There's also a third way\Nof navigating the trade-off. Dialogue: 0,0:07:57.10,0:08:01.04,Default,,0000,0000,0000,,You may have noticed, for example,\Nthat so far we've assumed Dialogue: 0,0:08:01.04,0:08:03.55,Default,,0000,0000,0000,,that the monopolist\Nmust charge the same price Dialogue: 0,0:08:03.55,0:08:05.02,Default,,0000,0000,0000,,to everyone. Dialogue: 0,0:08:05.02,0:08:07.21,Default,,0000,0000,0000,,Is this necessarily true? Dialogue: 0,0:08:07.21,0:08:09.15,Default,,0000,0000,0000,,In some cases,\Nthe monopolist can charge Dialogue: 0,0:08:09.15,0:08:11.32,Default,,0000,0000,0000,,different prices\Nto different people -- Dialogue: 0,0:08:11.32,0:08:13.38,Default,,0000,0000,0000,,price discrimination. Dialogue: 0,0:08:13.38,0:08:16.41,Default,,0000,0000,0000,,As we'll see in the next chapter\Nand set of lectures, Dialogue: 0,0:08:16.41,0:08:20.14,Default,,0000,0000,0000,,price discrimination explains a lot\Nabout how products are priced Dialogue: 0,0:08:20.14,0:08:22.88,Default,,0000,0000,0000,,and it also has some costs\Nand some benefits Dialogue: 0,0:08:22.88,0:08:24.84,Default,,0000,0000,0000,,which we'll be discussing. Dialogue: 0,0:08:24.84,0:08:26.46,Default,,0000,0000,0000,,See you then, thanks. Dialogue: 0,0:08:27.59,0:08:29.25,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself, Dialogue: 0,0:08:29.25,0:08:31.39,Default,,0000,0000,0000,,click "Practice Questions." Dialogue: 0,0:08:31.39,0:08:34.79,Default,,0000,0000,0000,,Or if you're ready to move on,\Njust click "Next Video." Dialogue: 0,0:08:34.79,0:08:38.73,Default,,0000,0000,0000,,♪ [music] ♪