Monopoly Regulacion

Guillaume Gérard
ECON4B
Guillaume Gérard
ECON4B
Model of Monopoly Regulation

Today’s work is about the model of monopoly regulation. We will try to explain the equations of the model and alsowhat are the impacts of weak institutional capacity on the rents of the monopoly. By weak institutional capacity we mean the limited capacities of states or institutions to regulate, to commit andalso the limited accountability and fiscal space. But before to know which variable could be influenced by those weak institutional capacities, I will start to explain the model.

COST: Cq=β-eq+FThe monopolist produces q at a fixed cost F. e is the firm’s effort that is the controlable part of costs. β is the underlying cost outside firm’s control that is not controllable.

UTILITY:U=qp-β-eq-F-ψe+t

The utility of the firm is equal to the revenues (profit, transfer…) minus the depenses (cost-function, disutility). P is the price and t is the transfer from the state to themonopolist. ψe is the “disutility”: when the firm uses an effort level of e, it will cause a disutility of ψe. We have to notice that during the maximization problem (beta revealed by a regulator)the utility has to be higher than 0.

CONSUMER WELFARE: V=Sq-qp-1+λt

When there is question about regulating a monopoly it is also for the consumers welfare (better quality, quantity or/andlower prices) so consumer surplus S(q) is a really important variable in the model. The consumers have to maximize their welfare. Consumers are taxpayers and part of the money they pay to the state isused for transfers to firms. λ represents thus the opportunity cost of those public funds or in other words if the public funds (transfers) are efficiently used.

GOVERNMENT WELFARE:W=U+V=Sq-β-eq-ψe-F-λt

What the government wants is to maximize the total welfare of the society. It means to maximize the sum of the monopoly’s utility with the consumer surplus. Governments could...