Question

Is it possible for a monopoly to achieve the same economic surplus as perfectly competitive market structure? Explain

Answer 1

A standard monopoly structure where the monopolist aims at maximizing profit by equating MR and MC may not yield same level of economic surplus (social welfare) as that of competitive set up. However, there are some other forms of monopoly, where the economic surplus can be as big as that in case of competitive structure. For instance,

(1) Perfect price discrimination: This is also called first degree price discrimination, where the monopolist can figure out the maximum willingness to pay for its consumers and charges different price to each consumer in such a way that it can extract all possible consumer surplus. It continues to sell till a point where price = MC. Hence, all the economic surplus goes to the monopolist in this case and there is no deadweight loss. In other words, the economic surplus or social welfare is same a that of competitive set up.

(2) Two-part tariff: In this case, pricing has two parts such as (a) a per unit price, which is set at the MC, i.e. P = MC and (b) an entry or participation fee which is equal to the consumer surplus at P=MC. By doing this, the monopolist manages to extract all the economic surplus and since P = MC, there is no deadweight loss. Hence, total economic surplus is same as that of competitive set up.