Chapter 13: Monopoly

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Welcome back to the Deep Dive.

Today, we're looking at something, well, glamorous diamonds.

You know Rihanna's song, right?

Shine bright like a diamond.

We'll think of them as super rare, super luxurious.

But here's a twist.

Geologists, they actually say natural diamonds aren't that uncommon.

Some sources even suggest they're more common than say emeralds.

That's right.

It's a bit counterintuitive.

So if they're not like naturally super scarce, how did they get this reputation, this feeling of being so precious, so exclusive?

What's the real story there?

Well, a huge part of De Beers managed to control most of the world's diamond mines.

Wow, most of them.

Yeah.

And by doing that, they could basically control the supply.

They deliberately limited how many diamonds hit the market to keep prices high.

So the rarity wasn't natural scarcity.

It was manufactured scarcity.

And that's a huge step away from what we think of as a normal competitive market.

De Beers wasn't just playing the game.

They were, well, what economists call a monopolist.

A monopolist.

And that's exactly what we're diving into today.

We're going to cut through the jargon and really understand what a monopoly is all about.

Right.

Our mission here is to give you a clear picture what defines a monopoly, how does it actually affect prices, and how much stuff gets produced with the impact on all of us, on society, and maybe what can policymakers even do about it.

And we'll touch on some really current stuff too, like those giant tech companies and how firms sometimes charge different prices for the same thing.

Price discrimination, yeah.

Okay, let's get started.

So to really wrap our heads around monopoly, we kind of need the bigger picture first.

How do economists even classify different markets?

Good starting point.

Yeah, economists generally use four main models.

Think of it like a spectrum.

On one end, you have perfect competition.

Okay.

On the absolute other end, you have monopoly.

And then in between, there's

monopolistic competition and oligopoly.

And how do they tell these apart?

What are the key things?

It boils down to two main questions.

First, how many companies are actually selling this stuff?

Is it just one, a handful, or like tons of them?

Okay, number of firms.

And second, is the product basically identical no matter who makes it, or is it differentiated?

Right, differentiated like Coke versus Pepsi, maybe, or different economics textbooks.

They cover similar ground, but they're not exactly the same.

Exactly.

Whereas identical goods would be more like, I don't know, a basic number two pencil, or maybe Christmas trees from different farms.

Pretty much the same thing.

These differences really matter for how firms act.

Makes sense.

So if we map this out, you can almost picture a chart.

Monopoly is that single producer selling a product that's, well, not really differentiated.

Just the one option.

Right.

Then oligopoly, there's just a few producers, their products could be identical, like maybe steel, or they could be cars.

Then you jump to the other side.

Perfect competition.

Loads of firms.

Identical product.

Think farming, maybe.

And monopolistic competition.

Also many firms, but their products are differentiated, like restaurants or clothing stores.

Got it.

And how many firms stick around in the long run, that really hinges on something called barriers to entry stuff that stops new companies from just jumping in.

We'll definitely get into that.

But understanding monopoly first, it actually helps make sense of oligopoly and monopolistic competition too.

Okay, let's go back to De Beers then.

That story sounds like a perfect starting point.

You mentioned Cecil Rhodes.

Yeah, Cecil Rhodes.

Back in the 1880s, South Africa was the place for diamonds.

But there were lots of different companies digging them up.

Rhodes, this British businessman and, well,

imperialist, saw a chance.

What did he do?

He started buying them out.

Systematically.

Buying after mine, consolidating them all under one umbrella.

De Beers.

By 1889, De Beers controlled something like 90 % of the world's diamond production.

90%.

That's incredible control.

Absolutely.

And that right there.

That's your definition of a monopolist.

A firm that's the only producer of a good that doesn't have any close substitutes.

And the industry itself.

That's the monopoly.

So it's the most extreme version compared to perfect competition.

Exactly.

The furthest you can get from it.

Now, in reality today, pure monopolies like that are pretty rare in places like the US.

We have antitrust laws designed to prevent them.

Right.

You hear about those sometimes.

Yeah.

You're much more likely to see an oligopoly, just a few big players, like in the car industry or airlines.

But monopolies do still exist.

Sometimes in pharmaceuticals, for example, often because of patents.

Okay.

So once a company becomes a monopolist, what do they actually do?

How does their behavior change?

This is where it gets kind of crucial, right?

It really is.

Right.

Think about an industry that was competitive.

Prices and how much gets made are set by supply and demand.

Right.

There's an equilibrium.

Okay.

But when a monopolist takes over, they don't just keep producing at that same level.

No, they look at the market and think, hmm, how can I make more profit?

And how do they do that?

They cut back production.

They deliberately make less of the good available than a competitive market would.

Okay.

Less stuff.

And because they're the only seller and people still want the product, they can then charge a higher price for that smaller quantity.

They basically shrink the total output to grab a bigger profit margin for themselves.

So less for consumers, higher prices, more profit for the one company.

That's the essence of it.

This ability to push the price up by cutting output, that's called market power.

It's the defining feature.

Market power.

Think about, say, a single wheat farmer.

They have zero market power.

They just have to accept whatever the market price is that day.

Right.

They're a price taker.

Exactly.

But your local water company, total different story.

They likely have significant market power.

If they raise prices, you don't really have another option for water, do you?

Not really, no.

So they can, and often do, raise prices.

Why?

To make more profit.

And here's a key thing.

Unlike in competitive markets where profits get competed away as new firms enter.

Yeah, everyone jumps in.

Monopolists can often keep making those above normal economic profits for a long, long time.

Because something is stopping competitors from entering.

Which leads perfectly to the next big question.

Why don't other companies jump in?

If there's so much profit to be made, what's holding them back?

That something is what we call barriers to entry.

And the textbook outlines five main types.

Ready?

Let's hear them.

Okay.

First, control of a scarce resource or input.

This is the De Beers story, right?

They controlled the diamond mines.

If you control the essential ingredient, nobody else can make the product.

Makes sense.

But interestingly, even this isn't always permanent.

Remember how De Beers' power weakened?

New diamond discoveries in places like Russia, Canada, Australia popped up in the 90s.

And now you've got high quality lab grown diamonds too.

So that barrier eroded.

Even resource control isn't foolproof.

Okay, what's number two?

Number two is increasing returns to scale.

This often leads to what's called a natural monopoly.

Natural monopoly.

Sounds like it's supposed to happen.

Kind of.

Think about your local natural gas provider laying all those pipes under the streets.

That costs a fortune.

Huge fixed costs.

Right.

Now if one company serves the whole town, they can spread those massive fixed costs over lots and lots of customers.

Their average cost per customer goes down as they sell more gas.

The more they sell, the cheaper it is per unit.

Exactly.

That's increasing returns to scale, or economies of scale.

If you tried to have two gas companies splitting the town, each would have higher average costs.

So one big firm is actually the cheapest way to supply the whole market.

That's a natural monopoly.

Like water or electricity grids too.

Precisely.

Local utilities are classic examples.

Imagine a graph here, like figure 13 -3 in the average total cost curve sloping downwards over the whole range of output that the market demands.

One big firm operates at a lower average cost than multiple smaller firms could.

Okay, got it.

Barrier three.

Technological superiority.

If one company just has way better technology, consistently they can dominate.

Think about Intel with computer chips back in the, say, 70s through the 90s.

Yeah, Intel inside was everywhere.

Right.

But like the resource barrier, this one often doesn't last forever either.

Competitors eventually catch up.

AMD caught up to Intel, right?

Technology diffuses.

True.

Okay, number four.

Network externalities.

This one is huge in today's economy.

Okay, what does that mean?

It means the value of a product to you increases the more other people use it.

Like the internet itself or Facebook.

Exactly.

The more people on Facebook, the more valuable it is to be on there yourself, right?

Same for Microsoft Windows or eBay or Amazon's marketplace.

The biggest network attracts the new users, creating this virtuous cycle for the dominant firm.

Which makes it really hard for a new competitor to break in.

Very hard.

It gives the leader immense market power.

It's similar in effect to increasing returns to scale, actually, and poses similar challenges for policy.

Okay, one barrier left.

Number five.

Government created barriers.

Sometimes the government itself creates a monopoly, usually temporarily.

The most common examples are patents and copyrights.

Ah, right.

Like for new drugs or inventions.

Exactly.

Merck got a patent for Propecia, the hair loss drug.

That gave them the exclusive right to sell it for a set period, usually 14 to 20 years, for patents.

Copyrights protect creative works, like books or music, for the creator's lifetime, plus 70 years.

And the idea is to encourage innovation.

Give people a reward for inventing things.

That's the justification, yes.

It's a trade -off.

Grant a temporary monopoly to incentivize people to create new things that benefit society in the long run.

But, like tech superiority, these barriers are designed to expire.

This government role brings up that drug price issue again.

You see these comparisons, like for Advair, the asthma drug, Americans pay, what, $300, $400 a month sometimes?

Right.

Well, in Canada or the UK, it's maybe a quarter or even a tenth of that price for the exact same medication.

Yeah.

The difference is stark, and it applies to many top -selling drugs.

And the reason is basically different government rules.

Largely, yes.

Most other developed countries actively negotiate or regulate drug prices.

The US, generally speaking, doesn't do that to the same extent.

The government, through Medicare, for instance, is actually forbidden from negotiating prices for many drugs.

So the drug companies argue they need those higher US prices to fund R &D, the research for new cures.

That's their argument, yes.

Developing new drugs is incredibly expensive and risky.

But critics say.

Critics argue that the prices are often way higher than needed just for R &D, that it leads companies to focus on minor variations of existing profitable drugs rather than true breakthroughs, and that it puts essential medicines out of reach for many.

It's a really tough debate with valid points on both sides about balancing innovation and access.

And before we move off barriers, there was that example about China and rare earths.

That sounded like a monopoly scare.

Ah, yes.

The monopoly that wasn't.

Back around 2010, China restricted exports of rare earth elements, things vital for electronics.

Prices shot up like dysprosium nearly quintupled.

Everyone panicked thinking China had this resource monopoly.

But they didn't.

Well, they dominated production mostly because they could do it cheaply, often with lower environmental standards back then.

But they didn't control all the world's reserves when prices spiked.

Suddenly, it became profitable to open mines elsewhere, like in Australia and the US, and even to increase recycling.

So China's dominance wasn't a sustainable monopoly built on true scarcity.

It was more about cost advantage, which eroded when prices rose high enough.

OK, that makes sense.

So we know why monopolies might exist.

Let's get into the nitty gritty.

How does a monopolist figure out exactly how much to produce and what price to charge to make the most profit?

Right.

The fundamental rule is actually the same for any profit maximizing firm, whether they're a monopolist or imperfect competition.

Produce the quantity where marginal revenue, MR, equals marginal cost, MC.

MR equals MC.

Oh.

OK.

But you said it works differently for a monopolist.

The difference lies in the marginal revenue part.

Remember the wheat farmer.

Perfect competition.

They face a flat horizontal demand curve.

They can sell another bushel at the going market price.

So for them, marginal revenue is the price.

PMR.

But the monopolist.

They face the entire market demand curve, which slips downward.

To sell one more unit, they have to lower the price.

Not just on that extra unit, but on all the ones they were already selling.

Exactly.

And that creates this wedge between the price and the marginal revenue.

Selling one more diamond, say, has two effects on De Beers' revenue.

OK, what are they?

First, there's the quantity effect.

They sell one more diamond, so revenue goes up by the price they get for that diamond.

That's good for them.

Makes sense.

But second, there's the price effect.

To sell that extra diamond, they had to lower the price on all the diamonds they sell.

So revenue goes down because those previous diamonds now sell for less.

That's bad for them.

Ah.

So the gain from selling one more is partly offset because they lose revenue on the others.

Precisely.

Which means the marginal revenue, the extra revenue from selling one more unit, is always less than the price the monopolist charges.

If you look at Table 13 .1 in the book, it shows this clearly.

When De Beers goes from selling 9 diamonds at $550 each to selling 10 diamonds at $500 each, their total revenue goes up.

But the marginal revenue of that 10th diamond is only $50, even though its price is $500.

That's the price effect biting hard.

Wow.

Only $50 extra revenue for a $500 diamond sale.

Because they lost $50 on each of the first 9 diamonds by lowering the price.

OK, so the MR curve must be different from the demand curve for a monopolist.

Absolutely.

If you picture Figure 13 -5, Panel A, you see the downward sloping demand curve.

The MR curve starts at the same point on the price axis, but slopes downward twice as steeply.

It's always below the demand curve.

That gap between them visually represents the price effect.

And Panel B shows total revenue.

Yeah.

It shows that total revenue first goes up as they sell more, quantity effect dominates, but then it peaks and starts to fall when the price effect becomes stronger than the quantity effect.

Total revenue is maximized when marginal revenue hits zero.

OK, so how do they use MR and MC to pick the price and quantity?

Let's use Figure 13 -6.

Assume their marginal cost is just flat at $200 per diamond for simplicity.

OK, so the monopolist looks for where the MR curve crosses the MC curve.

In Figure 13 -6, that's at point A.

You drop down to the quantity axis, and that tells you the profit maximizing quantity.

Let's say it's 8 diamonds.

QM equals 8.

But that's not the price, right?

That's a common mistake.

Exactly.

Big pitfall.

Point A only gives you the quantity.

To find the price, you go straight up from point A at 8 diamonds to the demand curve.

That's point B.

Then you go across to the price axis.

That price, let's say it's $600,

is the highest price consumers are willing to pay for those 8 diamonds.

That's PM, the monopoly price.

Ah, find where MR, MC for quantity, then go up to demand for price.

Got it.

And their profit.

Profit per diamond is the price, $600, minus the average total cost, which is just MC, $200 here.

$400 profit per diamond.

Multiply that by the quantity, 8 diamonds, and their total profit is $3200.

That's the shaded rectangle in the figure.

Okay, now compare that to what would happen if this was a perfectly competitive industry, still using Figure 13 -6.

Right.

In perfect competition, the industry produces where price equals marginal cost.

So you find where the demand curve intersects the MC curve.

That's point C in the figure.

Okay, point C looks like quantity is 16 diamonds and the price is $200.

Exactly.

So compared to perfect competition, the monopolist produces less, 8 versus 16, charges a higher price, $600 versus $200, and earns a positive economic profit, $3200, whereas the competitive industry earns zero economic profit in the long run.

That really shows the difference starkly.

Less output, higher price, profit for the firm.

And another quick point.

Because the monopolist chooses its price based on the demand curve after picking the quantity, it doesn't have a supply curve in the same way a competitive firm does.

There's no simple relationship between price and quantity supplied.

It depends on the demand curve.

Right.

They're not just responding to a price, they're setting it.

This reminds you of that electricity example you mentioned earlier, the California crisis.

Yes, that's a powerful real world case.

Historically, utilities were regulated natural monopolies.

But then came deradulation in the 90s.

The idea was competition among power generators with lower prices.

But it didn't always work out.

Often it didn't, partly because the transmission lines often remained a monopoly.

And in California, you had situations where a generator with market power could strategically withhold supply, especially during peak demand, causing prices to skyrocket.

Leading to blackouts and huge bills.

Exactly.

It showed the dangers of imperfect deregulation and the potential for market manipulation when you still have choke points with monopoly power.

It led many places to rethink or re -regulate.

Okay, so monopoly clearly benefits the firm, but it seems like consumers lose out.

What about the overall picture for society?

Is monopoly inefficient?

Yes.

Fundamentally, economists view monopoly as a source of inefficiency.

The reason is that the loss to consumers from the higher price and lower quantity is actually greater than the gain in profit for the monopolist.

How does that work?

Think about figure 13 -8.

Panel A shows perfect competition.

Price equals marginal cost.

All the area between the demand curve and the price line is consumer surplus, the benefit consumers get.

Total surplus is maximized.

Okay, big blue triangle of consumer benefit.

Right.

Now look at Panel B, the monopoly outcome.

The price is higher, PM, quantity lower, QM.

Consumer surplus shrinks to that smaller blue triangle at the top.

The monopolist gains profit, shown by the green rectangle.

I mean, they capture some of the old consumer surplus.

They do.

But look at that yellow triangle stuck between the competitive outcome and the monopoly outcome.

That's deadweight loss.

Deadweight loss.

It represents mutually beneficial trades that don't happen because the monopolist restricts output to keep the price high.

Consumers value those units more than it costs to make them, but they aren't produced.

That's a net loss to society.

Monopoly acts like a tax, really, driving a wedge between what consumers pay and the cost of production.

So it reduces the total economic pie.

If it's inefficient, what do governments do?

You mentioned antitrust.

Right.

For monopolies formed by mergers or anticompetitive actions, the main tool is antitrust policy laws aimed at preventing monopolies from forming or breaking up existing ones.

The Standard Oil Breakup in 1911 is the classic US example.

But what about those natural monopolies, where breaking them up would actually make things more expensive because you lose the economies of scale?

That's the tricky part.

Breaking them up isn't efficient.

So policymakers usually turn to two other options for natural monopolies.

Option one is public ownership.

The government just runs it directly, like the US Postal Service or Amtrak or some city -owned power companies.

What's the thinking there?

The idea is a public agency can set prices based on efficiency, maybe closer to marginal cost rather than maximizing profit.

But the downside is sometimes government agencies aren't as motivated to keep costs low, and they can be influenced by politics, maybe keeping unprofitable rights open for political reasons.

OK, public ownership.

What's option two?

Option two, more common in the US for utilities like electricity and water, is regulation, specifically price regulation.

The company stays private, but the government puts limits on the prices it can charge.

Like a price ceiling, doesn't that cause shortages?

Ah, good question.

In a competitive market, a price ceiling below equilibrium usually causes shortages.

But with a monopolist, it's different.

Remember, the unregulated monopolist charges a price way above marginal cost.

Right.

PM is higher than MC.

So if regulators set a price ceiling, PR, that's below the monopoly price, PM, but still above the firm's average total cost, the monopolist actually has an incentive to produce more output up to QR than they would have without the regulation.

Oh, interesting.

So regulation can actually increase output here.

It can, up to a point.

If you look at Figure 13 -9, Panel A shows how a price ceiling PR increases output and consumer surplus compared to the unregulated monopoly.

Panel B shows the ideal regulated price, PR, where the price equals average total cost.

This eliminates the monopoly profit entirely,

maximizes output while letting the firm break even, and gets rid of the deadweight loss.

So why not always just regulate at that break -even point?

Practical problems.

Regulators often don't know the firm's costs exactly.

The firm has an incentive to exaggerate costs to get a higher price ceiling.

And there's the risk of regulatory capture, where the regulators become too cozy with the industry they're supposed to regulate.

Still, most economists think some regulation of natural monopolies is usually better than none.

Okay, that covers traditional monopolies.

But you mentioned things are changing with the digital economy, a new kind of market power.

Exactly.

Those old -school single -firm monopolies are less common now.

But the rise of digital platforms driven by those network externalities we talked about is creating a new generation of market power.

Like Facebook, Google, Amazon, Apple.

Precisely.

With network effects, bigger really is better, so the largest platform tends to dominate.

And once dominant, they can exert market power, much like a traditional monopolist.

Leading to the same kind of inefficiency.

Higher prices, less output.

Yes, that potential for deadweight loss is there.

But with these fast -moving tech industries, there's another big concern.

Stifling innovation.

A dominant platform might buy out potential rivals.

Or use its control over the platform to disadvantage competing apps or services.

Like the accusations against Microsoft back in the browser wars.

Or more recent EU fines against Google.

Exactly.

Those kinds of things.

Even if they don't explicitly raise prices much, controlling the ecosystem can prevent new, potentially better alternatives from emerging.

And there's a related concept here too, right?

Not just monopoly,

but monopsony.

Yes, monopsony.

It's the flip side.

Monopoly is a single seller.

Monopsony is a single buyer.

A single buyer.

How does that work?

Think of a classic company town where one coal mine is the only major employer.

That mine is a monopsonist in the local labor market.

Ah, so they have power over the workers, the sellers of labor.

Right.

And just like a monopolist restricts output to raise prices, a monopsonist restricts to lower the price they pay.

The company town mine might hire fewer workers than would be hired in a competitive labor market, allowing them to pay lower wages.

Which also creates deadweight loss, presumably.

Yes.

Because there are workers willing to work for more than the mine's marginal benefit, but less than what a competitive wage would be.

But they don't get hired.

It's inefficient.

And how does this relate to the digital giants?

Well, platforms like Amazon, as a huge buyer of goods from third -party sellers, or the Apple App Store as the dominant buyer of apps for iPhones, can potentially exert monopsony power.

Also, Amazon can demand favorable terms or large discounts from suppliers because sellers have few alternative platforms with that kind of reach.

Apple's 30 % commission on app sales was challenged in the Apple v.

Pepper case as an exercise of monopsony power over app developers who have little choice but to use the App Store to reach iPhone users.

Amazon might also use data from its sellers to launch its own competing Amazon Basics products.

So these platforms can be both like monopolies to consumers and monopsony to suppliers.

That's the concern, yes.

They sit in the middle and can potentially squeeze both sides.

Which makes regulating them incredibly complicated.

If you break them up, do you lose the network benefits?

That's the dilemma.

Breaking up Facebook might make it less useful if your friends are scattered across different platforms.

And then there's the innovation issue again.

These companies are huge innovators, even if they also potentially stifle others.

Clumsy regulation could hurt the good stuff, too.

So what are policymakers actually doing?

It seems like the US has been less aggressive than, say, Europe.

That's generally true, according to the sources.

The scale is immense.

Google has over 90 % of search, Facebook, and Google dominate digital ads.

They've made acquisitions, Facebook buying Instagram and WhatsApp, Amazon buying diapers .com after a price war that might have triggered antitrust action in the past.

So why the lighter touch in the US, relatively speaking?

Explanations vary.

Some argue there's no easy fix for network effects, that consumers genuinely benefit massively from these services, often for free, and there's a fear of hindering innovation.

It's hard to prove direct consumer harm sometimes.

But critics push back.

Oh, definitely.

Critics argue policymakers need to consider the harm to suppliers, too, the monopsony issue, that dominance does stifle broader innovation and reduce quality or diversity, and that the sheer political power these companies wield is also a concern.

Plus, the rise of personalized pricing makes it hard to even track consumer exploitation.

The EU has clearly taken a more aggressive stance with fines and investigations.

It's really an ongoing, unresolved debate.

Fascinating.

And a bit unsettling.

Okay, let's shift to one last major topic connected to market power.

Price discrimination.

Charging different prices for the same thing.

You mentioned airlines earlier.

Right, the classic example.

Business traveler pays $500.

Student pays $150 for the exact same uncomfortable seat on the same flight.

How do they get away with it?

Yeah, how?

The logic is all about differences in price elasticity of demand, how sensitive different groups of consumers are to price changes.

Business travelers need to fly, maybe last minute, so they're less sensitive to price.

Students have more flexibility and less money, so they're super sensitive.

Exactly.

Imagine an airline, Air Sunshine, flying from Bismarck to Fort Lauderdale.

They figure there are 2 ,000 business folks willing to pay $550, and 2 ,000 students willing to pay only $150.

Let's say the cost, marginal cost, of flying one more person is $125.

If they had to charge one price, which would they pick?

If they charge $550,

they sell 2 ,000 tickets and make $550, $2 ,000, and $150 ,000 profit.

If they charge $150, they sell 4 ,000 tickets, assuming business folks would pay $152, but only make $150, $125, $4 ,000, $100 ,000 profit.

So they'd choose the single price of $550.

And miss out on selling to the students entirely.

Right.

But what if they can price discriminate?

Charge the business travelers $550, making $850 ,000 profit from them, and charge the students $150,

making $125, $125, $2 ,000, it's now $900.

They make more money by charging different prices.

By tapping into that student market, they would have otherwise ignored.

Figure 1310 probably shows this.

Yes, it visually separates the profit from the high price group B and the low price group S.

The key is segmenting the market and preventing resale.

You can't have students buying cheap tickets and selling them to business travelers.

How do airlines actually do that segmentation?

They don't ask, are you a business traveler?

No, they use proxies.

Rules that correlate with price sensitivity.

Things like requiring advanced purchase or a Saturday night stay.

Business travelers often can't do that.

Charging more for one -way tickets or last minute bookings.

These rules effectively sort people into high elasticity, leisure student, and low elasticity business groups.

And checking IDs prevents the resale.

Clever.

So is there a limit to this?

What's the ultimate price discrimination?

The theoretical limit is called perfect price discrimination.

This is where the monopolist knows exactly what each individual customer is willing to pay and charges them precisely that amount.

Wow.

So everyone pays a different price?

Potentially, yes.

The person willing to pay $1 ,000 pays $1 ,000.

The person willing to pay $151 pays $151.

Right down to the person willing to pay just above marginal cost.

What happens to consumer surplus then?

It completely disappears.

The monopolist captures all the surplus as profit.

If you look at figure 1311, it shows how moving from one price to two prices, then three, captures more surplus.

Panel C, perfect price discrimination, shows the entire area under the demand curve and above marginal cost becoming monopolist profit.

But nobody knows that much about their customers, right?

It's impossible.

Pretty much impossible in its pure form, yes.

But firms try to get closer using various techniques.

Advanced purchase rules, volume discounts, buy more, pay less per unit, two -part tariffs like paying a membership fee, Amazon Prime, and then paying per item.

Sales, outlet stores.

Exactly.

And the newest, potentially most powerful method,

digital personalized pricing.

Online retailers gather vast amounts of data about your browsing history, your purchase patterns, even what kind of computer you use.

What computer I use.

Yeah, there was a famous case where Orbitz apparently showed Mac users potentially more expensive hotel options than PC users based on the theory that Mac users, on average, might spend more.

They use data to estimate your individual willingness to pay and tailor offers accordingly.

That's getting much closer to perfect price discrimination.

It certainly is.

Now, here's a final interesting point on price discrimination.

Even though it feels unfair, economists often point out it can actually be more efficient than single price monopoly.

Because it allows the firm to sell to lower willingness to pay customers who would have been priced out entirely under a single high monopoly price.

Remember those students who wouldn't fly at $550?

With price discrimination, they get to fly at $150?

Those are mutually beneficial transactions that now do happen.

It reduces the deadweight loss.

So less deadweight loss even if the monopolist gets all the surpluses.

Potentially yes.

Which is why policymakers usually don't focus on stopping price discrimination itself unless it involves something essential and raises serious fairness concerns like maybe different ambulance prices based on perceived wealth.

The main focus is usually on preventing the deadweight loss from output restriction.

Wow, okay.

We have really gone from Rihanna singing about diamonds to the complex algorithms pricing things differently for each of us online.

It's been quite a journey through monopoly.

It really covers a lot of ground from century -old companies to cutting -edge digital platforms.

It just shows how these economic concepts help us understand so much about how the world works, why companies make the choices they do, and the impact on all of us.

Absolutely.

And perhaps it leaves us with a final thought to chew on.

As we all live more of our lives through these huge digital platforms, how do you think this constant tension between the amazing innovation they bring and the market power they hold?

How will that whole debate shape our future?

The way we buy things, connect with people, get information?

That is definitely something to think about.

A big question for the future.

Thank you for joining us for this deep dive into the often complex world of monopoly.

We really hope this gives you a clearer lens for understanding these powerful forces in our economy.

From all of us here at the Last Minute Lecture Team, thanks for listening and keep learning.