1 00:00:00,500 --> 00:00:06,357 [SQUEAKING] [RUSTLING] [CLICKING] 2 00:00:12,230 --> 00:00:14,900 JONATHAN GRUBER: OK, so let's continue. 3 00:00:14,900 --> 00:00:18,050 So this is actually, in some sense, 4 00:00:18,050 --> 00:00:19,860 a key breaking point in the course. 5 00:00:19,860 --> 00:00:22,430 Which is, in some sense what we've done so far 6 00:00:22,430 --> 00:00:25,160 is give you a set of tools to understand 7 00:00:25,160 --> 00:00:28,378 how to think about how consumers and producers make decisions, 8 00:00:28,378 --> 00:00:30,920 and then to understand how you compare positive and normative 9 00:00:30,920 --> 00:00:32,868 implications of economics. 10 00:00:32,868 --> 00:00:34,910 What we're going to do for the rest of the class, 11 00:00:34,910 --> 00:00:37,430 for the rest of the semester, is we're 12 00:00:37,430 --> 00:00:41,210 going to start to talk about how you apply those tools to more 13 00:00:41,210 --> 00:00:42,640 realistic situations. 14 00:00:42,640 --> 00:00:45,140 Let me answer your very first question, what you learn today 15 00:00:45,140 --> 00:00:47,240 is not on the midterm, OK? 16 00:00:47,240 --> 00:00:51,320 So that's the question that's all on your mind because it is. 17 00:00:51,320 --> 00:00:53,660 So the midterm tomorrow night will cover everything 18 00:00:53,660 --> 00:00:55,825 through what we covered through last week, 19 00:00:55,825 --> 00:00:57,950 but what we learn today will not be in the midterm. 20 00:00:57,950 --> 00:01:00,340 But don't leave because it will be on the final 21 00:01:00,340 --> 00:01:01,670 and it is interesting. 22 00:01:01,670 --> 00:01:03,320 So what we're going to do today is 23 00:01:03,320 --> 00:01:07,190 talk about taking the tools we developed so far in this class 24 00:01:07,190 --> 00:01:10,640 and applying to more realistic situations. 25 00:01:10,640 --> 00:01:13,310 And the more realist situation we're going to start with 26 00:01:13,310 --> 00:01:16,590 is the case of monopoly. 27 00:01:16,590 --> 00:01:21,350 And we don't talk about monopoly profit maximization. 28 00:01:21,350 --> 00:01:24,200 Now so far on the producer side we've 29 00:01:24,200 --> 00:01:27,450 been discussing one extreme of how the market's organized, 30 00:01:27,450 --> 00:01:29,370 which is perfect competition. 31 00:01:29,370 --> 00:01:31,220 And perfect competition is a wonderful sort 32 00:01:31,220 --> 00:01:33,680 of theoretical benchmark but never 33 00:01:33,680 --> 00:01:34,970 actually exists in reality. 34 00:01:34,970 --> 00:01:37,680 No market is perfectly competitive. 35 00:01:37,680 --> 00:01:42,800 The other extreme is not widely applicable but still does 36 00:01:42,800 --> 00:01:47,110 exist in reality, which is monopoly, OK? 37 00:01:47,110 --> 00:01:52,570 Monopoly is a situation where a market only has one firm in it. 38 00:01:52,570 --> 00:01:58,300 So a market with one firm is a monopoly market, OK? 39 00:01:58,300 --> 00:02:01,960 So that's basically a case where you have only one 40 00:02:01,960 --> 00:02:04,570 firm providing the good, OK? 41 00:02:04,570 --> 00:02:07,840 Now in reality, most markets fall 42 00:02:07,840 --> 00:02:11,460 between perfect competition, which never truly exists, 43 00:02:11,460 --> 00:02:13,720 and monopoly, which rarely exists. 44 00:02:13,720 --> 00:02:17,200 Most markets are in between, we call them oligopolies. 45 00:02:17,200 --> 00:02:20,830 That's markets with several firms 46 00:02:20,830 --> 00:02:22,750 but not perfectly competing. 47 00:02:22,750 --> 00:02:24,035 And we'll get to that. 48 00:02:24,035 --> 00:02:26,410 But that's actually one of the harder things we'll cover, 49 00:02:26,410 --> 00:02:28,780 so we're going to start with this other extreme of monopoly 50 00:02:28,780 --> 00:02:30,460 which gives us a lot of the insights we 51 00:02:30,460 --> 00:02:35,070 need for oligopoly but in a much simpler case. 52 00:02:35,070 --> 00:02:38,880 Now, the key thing with monopoly, the key difference 53 00:02:38,880 --> 00:02:42,150 from what we've done so far is that now firms 54 00:02:42,150 --> 00:02:46,200 are going to be price makers, not price takers. 55 00:02:46,200 --> 00:02:48,900 That's going to be the key change from the perfectly 56 00:02:48,900 --> 00:02:49,830 competitive situation. 57 00:02:49,830 --> 00:02:51,660 The perfectly competitive situation, 58 00:02:51,660 --> 00:02:53,700 from any given firm's perspective 59 00:02:53,700 --> 00:02:56,280 the price is something given them by the great market. 60 00:02:56,280 --> 00:02:58,170 OK, we talked with our two diagrams side 61 00:02:58,170 --> 00:03:01,170 by side about how the market gives the price. 62 00:03:01,170 --> 00:03:03,810 But we sort of-- from any given firm's perspective 63 00:03:03,810 --> 00:03:05,190 they were price taker. 64 00:03:05,190 --> 00:03:06,880 They couldn't affect the price. 65 00:03:06,880 --> 00:03:10,260 Monopolists however, when you're the only firm 66 00:03:10,260 --> 00:03:12,330 you get to set the price. 67 00:03:12,330 --> 00:03:16,260 So monopolists are going to be price makers, not price takers. 68 00:03:16,260 --> 00:03:19,980 And that's going to change the dynamics of everything we do, 69 00:03:19,980 --> 00:03:23,020 and that'll be our focus today, OK? 70 00:03:23,020 --> 00:03:25,750 So that's going to be the big change, 71 00:03:25,750 --> 00:03:30,520 we'll go from competitive markets to monopoly markets. 72 00:03:30,520 --> 00:03:35,410 Now, for the first 2/3 or 3/4 of the lecture 73 00:03:35,410 --> 00:03:37,430 we're going to make one other assumption. 74 00:03:37,430 --> 00:03:43,120 We are going to assume there is one price in this market, that 75 00:03:43,120 --> 00:03:46,148 is no price discrimination. 76 00:03:48,840 --> 00:03:51,810 This monopolist sets the price, but he 77 00:03:51,810 --> 00:03:54,240 sets one price for everybody. 78 00:03:54,240 --> 00:03:56,550 So if a monopolist is selling a good, 79 00:03:56,550 --> 00:04:00,350 they sell that at one price to everybody buys the good. 80 00:04:00,350 --> 00:04:02,557 Now once again, this is not super realistic, 81 00:04:02,557 --> 00:04:04,640 monopolists often have different prices for goods. 82 00:04:04,640 --> 00:04:06,827 But it's a very important, helpful extreme. 83 00:04:06,827 --> 00:04:09,410 And you've got to remember that we're imposing this constraint 84 00:04:09,410 --> 00:04:11,285 because it's going to drive the intuition I'm 85 00:04:11,285 --> 00:04:12,440 going to come to next, OK? 86 00:04:12,440 --> 00:04:15,380 So you're a firm selling a good at one price. 87 00:04:15,380 --> 00:04:20,019 You offer it up, anybody can buy it at that price, OK? 88 00:04:20,019 --> 00:04:22,300 Now, what we're going to do-- 89 00:04:22,300 --> 00:04:26,010 if you remember, a mon-- the fundamental part of producer 90 00:04:26,010 --> 00:04:27,910 that holds is the goal of monopolists 91 00:04:27,910 --> 00:04:35,320 is to maximize his profits, OK, which is revenues minus costs. 92 00:04:35,320 --> 00:04:37,330 And as we showed before, profits are 93 00:04:37,330 --> 00:04:42,320 maximized when marginal revenue equals marginal cost. 94 00:04:42,320 --> 00:04:45,710 That's the profit maximization point. 95 00:04:45,710 --> 00:04:49,160 Now, nothing on the cost side is going to change. 96 00:04:49,160 --> 00:04:54,200 So monopolish monopolist, the way we get cost curves 97 00:04:54,200 --> 00:04:54,893 doesn't change. 98 00:04:54,893 --> 00:04:56,810 That's all about-- remember, because that just 99 00:04:56,810 --> 00:04:59,670 comes the technology production and that 100 00:04:59,670 --> 00:05:02,512 comes from input prices. 101 00:05:02,512 --> 00:05:04,470 So nothing on the cost side is going to change. 102 00:05:04,470 --> 00:05:06,300 All that hard and somewhat boring 103 00:05:06,300 --> 00:05:09,470 work we did deriving cost functions and stuff, 104 00:05:09,470 --> 00:05:11,490 that all is-- that's done. 105 00:05:11,490 --> 00:05:13,740 The only place monopoly gets exciting is on the margin 106 00:05:13,740 --> 00:05:17,010 revenue side, because before we said marginal revenue was just 107 00:05:17,010 --> 00:05:19,500 price for a price taker. 108 00:05:19,500 --> 00:05:21,640 But that's no longer true. 109 00:05:21,640 --> 00:05:24,303 Marginal revenue is no longer just price. 110 00:05:24,303 --> 00:05:26,470 Now marginal revenue's going to be more interesting. 111 00:05:26,470 --> 00:05:29,020 So the monopoly difference, if you will, 112 00:05:29,020 --> 00:05:31,890 or the imperfect competition difference, 113 00:05:31,890 --> 00:05:34,032 doesn't come at all from the cost side. 114 00:05:34,032 --> 00:05:36,240 That side is done, doesn't matter what kind of market 115 00:05:36,240 --> 00:05:38,650 you're looking at, OK? 116 00:05:38,650 --> 00:05:40,120 All the interesting action here is 117 00:05:40,120 --> 00:05:43,480 on the revenue side as we think about monopoly and oligopoly 118 00:05:43,480 --> 00:05:45,280 markets, OK? 119 00:05:45,280 --> 00:05:48,910 So to think about that, let's go to figure 11-1. 120 00:05:52,870 --> 00:05:55,370 Think about-- let's start by think about a competitive firm. 121 00:05:55,370 --> 00:05:56,825 This is a diagram I could have shown earlier. 122 00:05:56,825 --> 00:05:59,450 It just sort of is a way to think about a competitive firm. 123 00:05:59,450 --> 00:06:02,840 Think about a competitive firm's profits. 124 00:06:02,840 --> 00:06:06,260 So imagine that this firm-- 125 00:06:06,260 --> 00:06:10,340 to make life easy let's imagine that we 126 00:06:10,340 --> 00:06:15,080 have a firm with marginal cost of 0, OK? 127 00:06:15,080 --> 00:06:20,660 So you've got demand curve, and so therefore any money you make 128 00:06:20,660 --> 00:06:21,680 is profit. 129 00:06:21,680 --> 00:06:22,982 And we're in the short run, OK? 130 00:06:22,982 --> 00:06:24,440 So there's profit in the short run, 131 00:06:24,440 --> 00:06:26,820 even for this perfectly competitive firm. 132 00:06:26,820 --> 00:06:29,430 But a perfectly competitive firm faces a horizontal demand 133 00:06:29,430 --> 00:06:30,160 curve. 134 00:06:30,160 --> 00:06:34,770 So if they sell q units, OK, they 135 00:06:34,770 --> 00:06:38,010 make profits of area a, which is simply 136 00:06:38,010 --> 00:06:41,700 q times P1, little q times P1. 137 00:06:41,700 --> 00:06:44,130 If they sell q plus 1 units, they 138 00:06:44,130 --> 00:06:46,980 make an extra profit rectangle of B. 139 00:06:46,980 --> 00:06:49,860 So literally, the marginal-- the extra profit they make 140 00:06:49,860 --> 00:06:54,840 is just the amount P. It's 1 times P1. 141 00:06:54,840 --> 00:06:58,190 The horizontal distance from q to q plus 1 is 1, 142 00:06:58,190 --> 00:07:00,390 the vertical distance is P1. 143 00:07:00,390 --> 00:07:03,358 So the marginal profit is just the price, OK? 144 00:07:03,358 --> 00:07:05,400 Marginal revenue, I'm sorry, it's just the price. 145 00:07:05,400 --> 00:07:06,352 Yeah? 146 00:07:06,352 --> 00:07:08,310 AUDIENCE: [INAUDIBLE] competitive [INAUDIBLE].. 147 00:07:08,310 --> 00:07:10,800 JONATHAN GRUBER: Once it's in the short run there can be, 148 00:07:10,800 --> 00:07:11,010 right? 149 00:07:11,010 --> 00:07:12,600 In the short run there can be profit in a competitive market. 150 00:07:12,600 --> 00:07:14,868 In the long run there's no profit, OK? 151 00:07:14,868 --> 00:07:16,410 So basically, their marginal revenue, 152 00:07:16,410 --> 00:07:21,390 what they make-- that next unit they make is the price, OK? 153 00:07:21,390 --> 00:07:25,810 Now let's think about a monopoly firm. 154 00:07:25,810 --> 00:07:31,410 A monopoly firm does not face a perfectly elastic demand curve 155 00:07:31,410 --> 00:07:34,590 because a monopoly firm's demand curve is the whole market. 156 00:07:34,590 --> 00:07:38,970 Notice little q has become big Q on the x-axis. 157 00:07:38,970 --> 00:07:41,910 The monopolist no longer faces only their perfectly elastic 158 00:07:41,910 --> 00:07:43,230 firm demand. 159 00:07:43,230 --> 00:07:46,710 They face a market demand, which can be any degree of elasticity 160 00:07:46,710 --> 00:07:48,270 but typically is somewhat elastic. 161 00:07:48,270 --> 00:07:50,350 It's downward sloping. 162 00:07:50,350 --> 00:07:51,910 Now let's say you're a monopolist 163 00:07:51,910 --> 00:07:56,070 and you're selling big Q units at a price P1. 164 00:07:56,070 --> 00:08:00,530 Your profits are C plus A. Once again, same marginal cost of 0 165 00:08:00,530 --> 00:08:03,060 to make this easy, or C plus A. 166 00:08:03,060 --> 00:08:06,050 Now let's say you want to sell one more unit. 167 00:08:06,050 --> 00:08:07,720 Well, what's different? 168 00:08:07,720 --> 00:08:09,420 What's different is now you're facing 169 00:08:09,420 --> 00:08:11,770 a downward sloping demand curve. 170 00:08:11,770 --> 00:08:13,950 So if you want to sell one more unit 171 00:08:13,950 --> 00:08:16,800 you have to lower the price. 172 00:08:16,800 --> 00:08:18,390 That's the difference. 173 00:08:18,390 --> 00:08:20,520 If you want to sell another unit, 174 00:08:20,520 --> 00:08:23,880 you can only do so by lowering the price. 175 00:08:23,880 --> 00:08:26,490 And you're a price maker, so you have the right to do that. 176 00:08:26,490 --> 00:08:27,990 So if you want to sell another unit, 177 00:08:27,990 --> 00:08:30,610 two things are going to happen. 178 00:08:30,610 --> 00:08:33,789 A, you are going to sell a second unit 179 00:08:33,789 --> 00:08:35,110 and make money on that unit. 180 00:08:35,110 --> 00:08:38,539 That's the area B. 181 00:08:38,539 --> 00:08:40,380 But b-- I should say one and two. 182 00:08:40,380 --> 00:08:41,630 One, you sell the second unit. 183 00:08:41,630 --> 00:08:43,415 That's the area B. 184 00:08:43,415 --> 00:08:46,040 Two, you will lose money all the other units 185 00:08:46,040 --> 00:08:50,030 you sold because now you have to lower the price. 186 00:08:50,030 --> 00:08:54,210 Because remember, there's only one price, OK? 187 00:08:54,210 --> 00:08:57,920 So basically, you used to make A plus C. 188 00:08:57,920 --> 00:09:04,010 Now you make A plus B. You've added B, but you've lost C. 189 00:09:04,010 --> 00:09:06,080 So what is the marginal revenue? 190 00:09:06,080 --> 00:09:08,390 The marginal revenue for a monopolist 191 00:09:08,390 --> 00:09:16,415 is now the area B minus the area C. Or P2, which is area B-- 192 00:09:16,415 --> 00:09:24,860 1 times P2 minus P2 minus P1 minus 193 00:09:24,860 --> 00:09:30,140 P2 times Q0, the original quantity. 194 00:09:30,140 --> 00:09:31,530 OK? 195 00:09:31,530 --> 00:09:33,420 This is the area C, but this is the area 196 00:09:33,420 --> 00:09:38,330 B. The original quantity times the change in price. 197 00:09:38,330 --> 00:09:40,670 So your marginal revenue is not this simple just priced 198 00:09:40,670 --> 00:09:41,253 more and more. 199 00:09:41,253 --> 00:09:44,690 Now it's this more complicated term, OK? 200 00:09:44,690 --> 00:09:48,710 More generally, marginal revenue can be defined 201 00:09:48,710 --> 00:09:53,810 as-- the marginal revenue is defined as-- 202 00:09:53,810 --> 00:10:04,630 marginal revenue is defined as P plus delta P delta Q times Q. 203 00:10:04,630 --> 00:10:08,200 That's marginal revenue. 204 00:10:08,200 --> 00:10:10,600 The first term is positive, that's 205 00:10:10,600 --> 00:10:13,820 the money you make on the next unit. 206 00:10:13,820 --> 00:10:17,260 The second term is negative because, by definition, 207 00:10:17,260 --> 00:10:18,940 the demand curve's downward sloping. 208 00:10:18,940 --> 00:10:20,920 There's no given goods anymore in this class. 209 00:10:20,920 --> 00:10:23,040 Demand may be on a test but not in reality. 210 00:10:23,040 --> 00:10:26,740 The demand curve's downward sloping, OK? 211 00:10:26,740 --> 00:10:29,010 So this term is negative. 212 00:10:29,010 --> 00:10:30,770 Now once again, I'm writing delta 213 00:10:30,770 --> 00:10:31,980 but really it's derivative. 214 00:10:31,980 --> 00:10:33,855 So this is all increment-- this is all-- this 215 00:10:33,855 --> 00:10:35,030 is sort of epsilon changes. 216 00:10:35,030 --> 00:10:37,280 This is Q0, OK? 217 00:10:37,280 --> 00:10:38,870 This is sort of epsilon changes. 218 00:10:38,870 --> 00:10:41,390 But the bottom line is, for an epsilon change in price 219 00:10:41,390 --> 00:10:42,660 you get-- 220 00:10:42,660 --> 00:10:46,120 for an epsilon change in quantity 221 00:10:46,120 --> 00:10:48,820 you get the price on the unit you 222 00:10:48,820 --> 00:10:50,550 sell minus the money you lost. 223 00:10:50,550 --> 00:10:53,350 And then you too can no longer sell, OK? 224 00:10:53,350 --> 00:10:57,960 This is the key intuition of monopoly math. 225 00:10:57,960 --> 00:10:58,737 The k-- yeah? 226 00:10:58,737 --> 00:11:00,404 AUDIENCE: What's that equation equal to? 227 00:11:00,404 --> 00:11:02,720 That [INAUDIBLE] 228 00:11:02,720 --> 00:11:05,370 JONATHAN GRUBER: This is your marginal revenue. 229 00:11:05,370 --> 00:11:06,820 I just did it graphically. 230 00:11:06,820 --> 00:11:09,030 That's your marginal revenue. 231 00:11:09,030 --> 00:11:10,760 You just see that from the graph, OK, 232 00:11:10,760 --> 00:11:13,183 and I just rewrote it here, OK? 233 00:11:13,183 --> 00:11:15,600 So basica-- or for those of you into calculus, if you just 234 00:11:15,600 --> 00:11:20,280 differentiate, just-- if those of you who have your calculus, 235 00:11:20,280 --> 00:11:25,950 you could just write, you know, dR dQ, d revenue dQ, OK, 236 00:11:25,950 --> 00:11:26,860 what do you get? 237 00:11:26,860 --> 00:11:31,620 You get P plus dP dQ times Q. That's just 238 00:11:31,620 --> 00:11:37,350 the derivative of revenue with respect to quantity, OK? 239 00:11:37,350 --> 00:11:40,660 So let's think intuitively about what's 240 00:11:40,660 --> 00:11:43,750 going on here because this is very, very important. 241 00:11:43,750 --> 00:11:47,110 What's going on here is to sell another unit 242 00:11:47,110 --> 00:11:49,360 you have to lower your price. 243 00:11:49,360 --> 00:11:51,670 You're working your way down your demand curve. 244 00:11:51,670 --> 00:11:53,920 And therefore, it offsets the benefit 245 00:11:53,920 --> 00:12:00,120 you get from selling another unit, OK? 246 00:12:00,120 --> 00:12:03,780 I like to call this the poisoning effect. 247 00:12:06,870 --> 00:12:08,780 I mean, it's not original to me but it's 248 00:12:08,780 --> 00:12:11,930 a term that I've heard use that I like, the poisoning effect. 249 00:12:11,930 --> 00:12:14,850 The idea is that to sell another unit, 250 00:12:14,850 --> 00:12:16,700 I have to poison myself a little bit 251 00:12:16,700 --> 00:12:21,632 by lowering the price on all the previous units I sold. 252 00:12:21,632 --> 00:12:23,840 If I want to go out in the market and force consumers 253 00:12:23,840 --> 00:12:25,970 to buy one more unit, I've got to lower the price 254 00:12:25,970 --> 00:12:30,050 on all the units which offsets money I used to make. 255 00:12:30,050 --> 00:12:33,540 So that's why we call it a sort of poisoning effect. 256 00:12:33,540 --> 00:12:37,590 Now, why doesn't a competitive firm face this issue? 257 00:12:37,590 --> 00:12:39,293 Why are we just bringing this up now? 258 00:12:39,293 --> 00:12:41,293 Why does a monopoly firm face a poisoning effect 259 00:12:41,293 --> 00:12:42,585 and a competitive firm doesn't? 260 00:12:42,585 --> 00:12:44,626 Or alternatively, another way to ask the question 261 00:12:44,626 --> 00:12:46,500 is, in what situation would a monopoly firm 262 00:12:46,500 --> 00:12:48,930 not face a poisoning effect? 263 00:12:48,930 --> 00:12:50,531 Yeah? 264 00:12:50,531 --> 00:12:53,140 AUDIENCE: Actually, in a [INAUDIBLE] 265 00:12:53,140 --> 00:12:59,622 in a competitive firm [INAUDIBLE] 266 00:12:59,622 --> 00:13:00,580 JONATHAN GRUBER: Right. 267 00:13:00,580 --> 00:13:02,205 They're not-- that's [INAUDIBLE] right. 268 00:13:02,205 --> 00:13:03,930 The competitive firm's the price taker. 269 00:13:03,930 --> 00:13:07,410 But in particular, even though the price taker, 270 00:13:07,410 --> 00:13:11,240 why when they sell more quantity is there no poisoning effect? 271 00:13:11,240 --> 00:13:11,810 Yeah? 272 00:13:11,810 --> 00:13:13,080 AUDIENCE: Demand is perfectly inelastic? 273 00:13:13,080 --> 00:13:15,140 JONATHAN GRUBER: Demand it's is perfectly elastic. 274 00:13:15,140 --> 00:13:16,557 The firm faced a perfectly elast-- 275 00:13:16,557 --> 00:13:20,060 so likewise, a monopolist facing a perfectly elastic demand 276 00:13:20,060 --> 00:13:22,340 would also have no poisoning effect. 277 00:13:22,340 --> 00:13:25,240 Think of it this way, what is dP dQ 278 00:13:25,240 --> 00:13:26,790 with perfectly elastic demand? 279 00:13:26,790 --> 00:13:28,730 Zero. 280 00:13:28,730 --> 00:13:30,530 The price doesn't change, you sell more. 281 00:13:30,530 --> 00:13:33,140 So the reason the perfectly competitive firm 282 00:13:33,140 --> 00:13:35,270 face no poisoning effect is because it's facing a-- 283 00:13:35,270 --> 00:13:36,830 it doesn't, the price doesn't have 284 00:13:36,830 --> 00:13:39,502 to change to sell more units, OK? 285 00:13:39,502 --> 00:13:41,210 But a monopolist faces a poisoning effect 286 00:13:41,210 --> 00:13:45,225 because it's got a downward sloping demand curve. 287 00:13:45,225 --> 00:13:46,220 OK? 288 00:13:46,220 --> 00:13:47,910 So we can actually see this-- 289 00:13:47,910 --> 00:13:51,950 so what we want to do in figure 11-3 290 00:13:51,950 --> 00:13:56,430 is we graph the monopolist's marginal revenue curve. 291 00:13:56,430 --> 00:13:58,400 So let's actually work out the math here. 292 00:13:58,400 --> 00:14:01,167 Let's imagine there's a demand curve. 293 00:14:01,167 --> 00:14:03,000 Let's imagine that I've got a demand curve-- 294 00:14:03,000 --> 00:14:05,510 and I'm just making this up-- demands of the form A 295 00:14:05,510 --> 00:14:08,150 equals 24 minus p, OK? 296 00:14:08,150 --> 00:14:12,530 Let's just say that's the demand curve, OK? 297 00:14:12,530 --> 00:14:17,270 Now the first step is to flip the way we express this 298 00:14:17,270 --> 00:14:20,060 and write this-- write price as a function of quantity 299 00:14:20,060 --> 00:14:22,200 because now the monopolist is choosing his price. 300 00:14:22,200 --> 00:14:26,060 So we can write that p equals 24 minus Q, OK? 301 00:14:26,060 --> 00:14:29,540 Just inverting it, writing price as a function of quantity. 302 00:14:29,540 --> 00:14:33,950 So in this case revenues, which are equal to p times Q, 303 00:14:33,950 --> 00:14:37,640 are equal to 24Q minus Q squared. 304 00:14:37,640 --> 00:14:41,540 I just multiply through by Q. 305 00:14:41,540 --> 00:14:45,230 So marginal revenues differentiating 306 00:14:45,230 --> 00:14:50,398 are just 24 minus 2Q, OK? 307 00:14:50,398 --> 00:14:52,690 So once again, this is a new sort of mathematical trick 308 00:14:52,690 --> 00:14:54,690 you'll have to get used to. 309 00:14:54,690 --> 00:14:56,500 Flip the demand curve, so you express price 310 00:14:56,500 --> 00:14:57,870 as a function of quantity. 311 00:14:57,870 --> 00:15:02,340 Multiply through by Q and then differentiate, 312 00:15:02,340 --> 00:15:06,810 and you get that marginal revenue is 24 minus 2Q. 313 00:15:06,810 --> 00:15:09,030 So you can see that in figure 11-3, 314 00:15:09,030 --> 00:15:15,050 the marginal revenue curve is the demand curve shifted in, 315 00:15:15,050 --> 00:15:16,520 OK? 316 00:15:16,520 --> 00:15:21,260 Now in fact, this nice relationship 317 00:15:21,260 --> 00:15:22,220 will not always hold. 318 00:15:22,220 --> 00:15:23,690 This sort of picture of a marginal revenue 319 00:15:23,690 --> 00:15:24,810 curve being the demand curve shift [INAUDIBLE] 320 00:15:24,810 --> 00:15:25,410 will not always hold. 321 00:15:25,410 --> 00:15:27,290 It only holds for certain functional forms. 322 00:15:27,290 --> 00:15:29,870 Mostly we'll use functional forms for where it holds. 323 00:15:29,870 --> 00:15:32,330 The main lesson is the marginal revenue curve 324 00:15:32,330 --> 00:15:35,480 has to be at or below the demand curve. 325 00:15:35,480 --> 00:15:37,100 That's the proof, OK? 326 00:15:37,100 --> 00:15:40,130 Whether it has this nice sort of shifted in relationship, 327 00:15:40,130 --> 00:15:42,555 that depends very much on functional form. 328 00:15:42,555 --> 00:15:44,930 But what is absolutely true is the marginal revenue curve 329 00:15:44,930 --> 00:15:48,530 is always everywhere at or below the demand curve. 330 00:15:48,530 --> 00:15:49,280 Why? 331 00:15:49,280 --> 00:15:51,260 Because the demand curve-- 332 00:15:51,260 --> 00:15:53,210 because by selling a next unit you're 333 00:15:53,210 --> 00:15:55,575 going to make less through this poisoning effect. 334 00:15:55,575 --> 00:15:57,200 So the marginal revenue curve is always 335 00:15:57,200 --> 00:16:00,590 below the demand curve, all right? 336 00:16:00,590 --> 00:16:03,720 Questions about that? 337 00:16:03,720 --> 00:16:10,470 OK, so now let's go on and let's talk about the critical 338 00:16:10,470 --> 00:16:12,600 relationship which I just developed-- intuitive, 339 00:16:12,600 --> 00:16:14,220 let's do it mathematically-- 340 00:16:14,220 --> 00:16:19,630 between marginal revenue and the elasticity of demand. 341 00:16:19,630 --> 00:16:22,410 OK, so take this-- 342 00:16:22,410 --> 00:16:29,740 we've got our marginal revenue expression, 343 00:16:29,740 --> 00:16:40,180 marginal revenue equals p plus delta p delta Q times Q, OK? 344 00:16:40,180 --> 00:16:43,540 Now take that expression and multiply and divide by p. 345 00:16:43,540 --> 00:16:45,290 So I'm just going to take this expression, 346 00:16:45,290 --> 00:16:48,770 I'm going to multiply and divide by p, OK? 347 00:16:48,770 --> 00:16:53,240 Then I'm going to get p plus delta 348 00:16:53,240 --> 00:17:02,360 p over p delta Q over Q times Q over p-- 349 00:17:05,348 --> 00:17:06,286 oh, p plus p. 350 00:17:06,286 --> 00:17:07,619 I'm sorry, no, I did this wrong. 351 00:17:07,619 --> 00:17:09,054 My bad, don't write that down. 352 00:17:09,054 --> 00:17:11,266 I've got to look more at my notes. 353 00:17:11,266 --> 00:17:12,349 I'm going to write it as-- 354 00:17:12,349 --> 00:17:13,932 I'm going to multiply and divide by p. 355 00:17:13,932 --> 00:17:21,890 p plus p times, yeah, delta p delta Q times Q over p. 356 00:17:21,890 --> 00:17:23,569 I skipped a step. 357 00:17:23,569 --> 00:17:25,310 So I just multiplied and divided by p, 358 00:17:25,310 --> 00:17:26,869 multiplied and divided by p. 359 00:17:26,869 --> 00:17:31,810 p plus p times delta Q, delta p over delta Q times Q over p, 360 00:17:31,810 --> 00:17:32,570 OK? 361 00:17:32,570 --> 00:17:36,020 Now if you look at this expression, delta p over delta 362 00:17:36,020 --> 00:17:39,080 Q times Q over p, that is the inverse 363 00:17:39,080 --> 00:17:42,330 of the elasticity of demand. 364 00:17:42,330 --> 00:17:48,160 So you can rewrite this as p plus p times 1 365 00:17:48,160 --> 00:17:51,510 over the elasticity of demand. 366 00:17:51,510 --> 00:17:54,270 Or rewriting one more time, that marginal revenue 367 00:17:54,270 --> 00:17:59,630 equals p times 1 plus 1 over the elasticity of demand. 368 00:17:59,630 --> 00:18:03,110 Marginal revenue equals p times 1 plus 1 369 00:18:03,110 --> 00:18:06,870 over the elasticity of demand. 370 00:18:06,870 --> 00:18:08,730 So think about this for a second. 371 00:18:08,730 --> 00:18:11,360 This gets the intuition we just talked about. 372 00:18:11,360 --> 00:18:13,890 If e is-- if the elasticity is negative infinite-- 373 00:18:13,890 --> 00:18:15,510 is negative infinity-- 374 00:18:15,510 --> 00:18:16,587 OK I had it wrong with 0. 375 00:18:16,587 --> 00:18:19,170 It's the elasticity of demand is negative infinity then you've 376 00:18:19,170 --> 00:18:20,213 a competitive market. 377 00:18:20,213 --> 00:18:22,380 Perfectly competitive market is elasticity of demand 378 00:18:22,380 --> 00:18:28,280 negative infinity so you get a competitive market, OK? 379 00:18:28,280 --> 00:18:30,380 As the elasticity of demand-- 380 00:18:30,380 --> 00:18:39,460 but if the elasticity of demand is 0, if the elasticity of-- 381 00:18:39,460 --> 00:18:42,285 if the elasticity of demand goes like-- the elasticity of demand 382 00:18:42,285 --> 00:18:43,110 is negative 1. 383 00:18:43,110 --> 00:18:44,060 Let's do that case. 384 00:18:44,060 --> 00:18:47,510 So negative infinity is perfectly competitive, OK? 385 00:18:47,510 --> 00:18:49,070 What about negative 1? 386 00:18:49,070 --> 00:18:51,020 What's special about the elasticity of demand 387 00:18:51,020 --> 00:18:53,630 of negative 1 in this case? 388 00:18:53,630 --> 00:18:55,940 What's the marginal revenue? 389 00:18:55,940 --> 00:18:57,080 0. 390 00:18:57,080 --> 00:19:00,020 That's the case going back to figure 11-2 where 391 00:19:00,020 --> 00:19:03,263 B and C exactly cancel out. 392 00:19:03,263 --> 00:19:04,680 So you probably thought about this 393 00:19:04,680 --> 00:19:05,580 when you looked at this graph. 394 00:19:05,580 --> 00:19:07,330 You probably quickly asked yourself, well, 395 00:19:07,330 --> 00:19:09,270 should the monopolist try to sell more or not? 396 00:19:09,270 --> 00:19:11,103 Well the answer is, the elasticity of demand 397 00:19:11,103 --> 00:19:13,690 is minus 1, they're indifferent. 398 00:19:13,690 --> 00:19:15,490 So this is sort of the important insight. 399 00:19:15,490 --> 00:19:17,665 With an elastic demand of minus 1, 400 00:19:17,665 --> 00:19:20,918 me monopolist is indifferent about selling another unit 401 00:19:20,918 --> 00:19:22,960 because what they gain from selling the unit they 402 00:19:22,960 --> 00:19:24,765 lose on the previous units. 403 00:19:24,765 --> 00:19:26,890 If the elasticity of demand is greater than minus 1 404 00:19:26,890 --> 00:19:29,410 absolute value, then they're going to lose money 405 00:19:29,410 --> 00:19:32,450 by selling additional units. 406 00:19:32,450 --> 00:19:36,030 If the elasticity of demand is less than 1, 407 00:19:36,030 --> 00:19:40,398 then they're going to make money by selling additional units. 408 00:19:40,398 --> 00:19:41,690 But let's-- I'm skipping ahead. 409 00:19:41,690 --> 00:19:46,080 Let's go on and talk about profit maximization, OK? 410 00:19:46,080 --> 00:19:48,690 So let's go on and take the next step which is the monopoly 411 00:19:48,690 --> 00:19:50,580 profit maximization. 412 00:19:50,580 --> 00:19:53,100 Imagine a monopolist's cost function curve is 413 00:19:53,100 --> 00:19:55,485 of the form 12 plus q squared. 414 00:19:55,485 --> 00:19:57,360 Let's take the same monopolist and write down 415 00:19:57,360 --> 00:20:02,340 cost function of 12 plus q squared, OK? 416 00:20:02,340 --> 00:20:07,800 So with this cost function, marginal cost equals 2q. 417 00:20:07,800 --> 00:20:11,070 That's marginal cost with this cost function, OK? 418 00:20:11,070 --> 00:20:13,980 So what's the profit maximization rule? 419 00:20:13,980 --> 00:20:17,265 It's that marginal revenue equals marginal cost. 420 00:20:17,265 --> 00:20:23,380 Well marginal revenue, we wrote down here, is 24 minus 2Q, 421 00:20:23,380 --> 00:20:28,225 so it's where 24 minus 2Q equals marginal-- 422 00:20:28,225 --> 00:20:31,077 I should-- equals marginal cost. 423 00:20:31,077 --> 00:20:32,660 Now with monopolists here's the trick, 424 00:20:32,660 --> 00:20:34,420 little q and big Q are the same. 425 00:20:34,420 --> 00:20:36,130 So I wrote a little q here, but if you're 426 00:20:36,130 --> 00:20:38,200 the only firm in the market little q and big Q 427 00:20:38,200 --> 00:20:39,265 are the same, right? 428 00:20:39,265 --> 00:20:41,050 There's only one firm in the market. 429 00:20:41,050 --> 00:20:42,910 So 24 minus 2Q equals-- 430 00:20:42,910 --> 00:20:46,450 it's a big Q now-- equals 2Q. 431 00:20:46,450 --> 00:20:51,370 So the optimization point is where 24 equals 4Q or Q 432 00:20:51,370 --> 00:20:54,390 star equals six. 433 00:20:54,390 --> 00:20:58,320 That's the optimal-- that's the profit maximizing 434 00:20:58,320 --> 00:21:02,610 sale on quantity for the monopolist is 435 00:21:02,610 --> 00:21:05,310 where 24 minus 2Q, where marginal revenue equals 436 00:21:05,310 --> 00:21:05,950 marginal cost. 437 00:21:05,950 --> 00:21:09,210 We derive marginal revenue, OK? 438 00:21:09,210 --> 00:21:12,390 Marginal cost we know how to derive from our cost function. 439 00:21:12,390 --> 00:21:16,830 We set them equal and we get the optimizing quantity, OK? 440 00:21:16,830 --> 00:21:19,695 And you can see this in figure 11-4. 441 00:21:25,170 --> 00:21:28,790 Figure 11-4 shows what's going on here. 442 00:21:28,790 --> 00:21:30,320 So I've driven all the va-- 443 00:21:30,320 --> 00:21:34,500 I've drawn all the various cost curves for this cost function, 444 00:21:34,500 --> 00:21:35,895 OK? 445 00:21:35,895 --> 00:21:37,270 I've driven all the various costs 446 00:21:37,270 --> 00:21:39,760 first for this cost function. 447 00:21:39,760 --> 00:21:42,190 You can see the marginal cost curve 448 00:21:42,190 --> 00:21:44,770 and then you can see it intersects the marginal revenue 449 00:21:44,770 --> 00:21:48,990 curve at a quantity of 6. 450 00:21:48,990 --> 00:21:53,340 Intersects the marginal revenue curve at a quantity of 6, OK? 451 00:21:53,340 --> 00:21:56,066 What is the price? 452 00:21:56,066 --> 00:21:58,320 Someone raise their hand and tell me, tell me why. 453 00:21:58,320 --> 00:21:59,470 The quantity 6, what's-- 454 00:21:59,470 --> 00:22:01,250 what price has the monopolist set? 455 00:22:01,250 --> 00:22:01,833 Yeah? 456 00:22:01,833 --> 00:22:02,437 AUDIENCE: 18. 457 00:22:02,437 --> 00:22:03,270 JONATHAN GRUBER: 18. 458 00:22:03,270 --> 00:22:04,800 Why-- you're supposed to get that wrong. 459 00:22:04,800 --> 00:22:06,810 You didn't-- you didn't, you didn't follow my instructions, 460 00:22:06,810 --> 00:22:07,850 you didn't get it wrong. 461 00:22:07,850 --> 00:22:09,270 You got it right, I'm just joking. 462 00:22:09,270 --> 00:22:11,220 How did you know it was 18 and not 12? 463 00:22:11,220 --> 00:22:13,470 Usually people guess 12 because that's the point where 464 00:22:13,470 --> 00:22:14,345 the curves intersect. 465 00:22:14,345 --> 00:22:15,030 Why is it 18? 466 00:22:15,030 --> 00:22:16,210 AUDIENCE: You can go up to the demand curve 467 00:22:16,210 --> 00:22:17,370 because that's what people are willin-- 468 00:22:17,370 --> 00:22:19,245 JONATHAN GRUBER: Because even the monopolist, 469 00:22:19,245 --> 00:22:22,590 as powerful as he is, has to respect demand. 470 00:22:22,590 --> 00:22:25,600 So the monopolist if they're going to sell 6 units, 471 00:22:25,600 --> 00:22:28,390 they have to choose a price such that people 472 00:22:28,390 --> 00:22:30,020 want to buy 6 units. 473 00:22:30,020 --> 00:22:31,667 So your intuition, which is my fault-- 474 00:22:31,667 --> 00:22:33,750 I've always said, look where the curves intersect, 475 00:22:33,750 --> 00:22:35,110 do a quantity and a price-- 476 00:22:35,110 --> 00:22:37,068 your quick intuition, which was to look and say 477 00:22:37,068 --> 00:22:40,930 the price was 12, which was the wrong answer I usually get, OK, 478 00:22:40,930 --> 00:22:44,290 is wrong because you need to actually respect 479 00:22:44,290 --> 00:22:46,000 the demand curve. 480 00:22:46,000 --> 00:22:48,580 So a monopolist solves for the optimal quantity, 481 00:22:48,580 --> 00:22:50,410 but then to get the optimal price 482 00:22:50,410 --> 00:22:52,400 he has to plug this back into the demand curve. 483 00:22:52,400 --> 00:22:53,650 Well, what's demand? 484 00:22:53,650 --> 00:22:56,860 Demand is 24 minus p. 485 00:22:56,860 --> 00:23:00,500 So-- I'm sorry, it's p equals 24 minus Q, that's our demand. 486 00:23:00,500 --> 00:23:08,480 So if Q star is 6, then price is 24 minus 6, or 18. 487 00:23:08,480 --> 00:23:13,580 P star is 18, and that is what you will get wrong 488 00:23:13,580 --> 00:23:14,493 when you do this. 489 00:23:14,493 --> 00:23:16,910 If you're going to get anything wrong in monopoly problems 490 00:23:16,910 --> 00:23:18,952 this is what you're going to get wrong, OK, which 491 00:23:18,952 --> 00:23:20,750 is remembering you can't just-- 492 00:23:20,750 --> 00:23:23,630 at the end you have to do an extra step here. 493 00:23:23,630 --> 00:23:26,930 To get the price you have to solve for quantity, 494 00:23:26,930 --> 00:23:29,550 but then respect the demand curve to get the price. 495 00:23:29,550 --> 00:23:31,820 There's a question somewhere. 496 00:23:31,820 --> 00:23:33,415 OK, yeah, question? 497 00:23:33,415 --> 00:23:38,922 AUDIENCE: [INAUDIBLE] of the intersection of the [INAUDIBLE] 498 00:23:38,922 --> 00:23:40,380 JONATHAN GRUBER: It's pretty much-- 499 00:23:40,380 --> 00:23:42,930 yeah, it's pretty much meaningless. 500 00:23:42,930 --> 00:23:46,400 So that intersection used to pin down the quantity, but price 501 00:23:46,400 --> 00:23:47,960 has to come from the demand curve 502 00:23:47,960 --> 00:23:49,460 because you have to respect-- 503 00:23:49,460 --> 00:23:50,877 you can't sell something consumers 504 00:23:50,877 --> 00:23:52,488 don't want to buy, OK? 505 00:23:52,488 --> 00:23:54,280 So you've got to respect that demand curve. 506 00:23:57,440 --> 00:24:01,860 And in fact, you can show yourself-- 507 00:24:01,860 --> 00:24:08,350 so basically-- OK, so basically that's 508 00:24:08,350 --> 00:24:13,790 the profit maximization except this stupid goddamn shutdown 509 00:24:13,790 --> 00:24:15,155 rule still holds. 510 00:24:15,155 --> 00:24:17,655 In the short run we still have to respect to shut down rule, 511 00:24:17,655 --> 00:24:20,270 so you still have to check, is price 512 00:24:20,270 --> 00:24:22,320 less than average variable cost? 513 00:24:22,320 --> 00:24:26,910 Now once again, in this function OK, in this f-- 514 00:24:26,910 --> 00:24:28,420 you have to check with the price. 515 00:24:28,420 --> 00:24:30,780 So even if profits are negative you're 516 00:24:30,780 --> 00:24:32,850 still going to have to check if price is greater 517 00:24:32,850 --> 00:24:34,017 than average variable costs. 518 00:24:34,017 --> 00:24:37,558 Now here at 6 units, the average variable cost is 6. 519 00:24:37,558 --> 00:24:39,600 You see-- we could see-- you see the dashed line. 520 00:24:39,600 --> 00:24:41,912 If we sell 6 units, the average variable cost is 6. 521 00:24:41,912 --> 00:24:44,370 So clearly price is greater than the average variable cost. 522 00:24:44,370 --> 00:24:46,200 You wouldn't shut down, you're making positive profits, 523 00:24:46,200 --> 00:24:46,990 in fact. 524 00:24:46,990 --> 00:24:50,310 You're making profits of 60, OK, so you wouldn't shut down. 525 00:24:50,310 --> 00:24:53,920 But you always do have to check the shut down rule, OK? 526 00:24:53,920 --> 00:24:57,370 So that's how you do a monopoly problem, OK? 527 00:24:57,370 --> 00:25:00,920 Just to go back, how you do a monopoly problem, 528 00:25:00,920 --> 00:25:03,260 you'll be given a cost function-- 529 00:25:03,260 --> 00:25:05,270 you know what to do those in your sleep-- 530 00:25:05,270 --> 00:25:06,960 and a demand function. 531 00:25:06,960 --> 00:25:10,060 The demand function gets turned into a marginal revenue 532 00:25:10,060 --> 00:25:12,790 function simply through these couple of steps. 533 00:25:12,790 --> 00:25:16,190 So the demand function gives you a marginal revenue function. 534 00:25:16,190 --> 00:25:18,560 If you have marginal revenue and you have marginal cost, 535 00:25:18,560 --> 00:25:21,657 then you know how to solve for optimal quantity. 536 00:25:21,657 --> 00:25:24,240 If you have optimal quantity and you respect the demand curve, 537 00:25:24,240 --> 00:25:26,650 you know how to solve for price. 538 00:25:26,650 --> 00:25:32,200 Once you have a price, OK, and an average cost curve 539 00:25:32,200 --> 00:25:35,230 you can both check the shutdown rule and compute profits. 540 00:25:35,230 --> 00:25:39,310 Profits are simply the price you get minus average costs. 541 00:25:39,310 --> 00:25:43,350 So we can compute the profit and check the shutdown rule, OK? 542 00:25:43,350 --> 00:25:46,560 So the only thing we did here that's new 543 00:25:46,560 --> 00:25:49,080 is this sort of interesting quirk that we have, 544 00:25:49,080 --> 00:25:50,790 this new marginal revenue function. 545 00:25:50,790 --> 00:25:53,123 Otherwise, it's the same sort of analysis we did before. 546 00:25:55,470 --> 00:25:58,040 So this should be doable with some practice. 547 00:25:58,040 --> 00:26:03,520 Now, the key-- a key concept here that we need to think 548 00:26:03,520 --> 00:26:06,020 about, that comes to question, you might have asked yourself 549 00:26:06,020 --> 00:26:07,160 at some point-- 550 00:26:07,160 --> 00:26:09,650 you might have said, well, if monopolists 551 00:26:09,650 --> 00:26:12,140 are the only firm in the market, why don't they 552 00:26:12,140 --> 00:26:14,520 just charge whatever they want? 553 00:26:14,520 --> 00:26:15,692 Why do they have to-- 554 00:26:15,692 --> 00:26:18,150 why are they sort of constrained by the sort of mathematics 555 00:26:18,150 --> 00:26:19,650 we've done before? 556 00:26:19,650 --> 00:26:23,370 And to answer this, let's turn to the concept of market power. 557 00:26:25,910 --> 00:26:28,280 The market power of monopolists we 558 00:26:28,280 --> 00:26:32,270 will define as their ability to charge price greater 559 00:26:32,270 --> 00:26:34,760 than marginal cost. 560 00:26:34,760 --> 00:26:37,060 Your ability to charge price greater than margin cost 561 00:26:37,060 --> 00:26:38,180 is your market power. 562 00:26:38,180 --> 00:26:40,490 In other words, competitive firms have no market power. 563 00:26:40,490 --> 00:26:41,907 They have to charge a price that's 564 00:26:41,907 --> 00:26:43,260 the same as their marginal cost. 565 00:26:43,260 --> 00:26:45,890 And that's why they make no money. 566 00:26:45,890 --> 00:26:49,180 Monopolists have market power, OK? 567 00:26:49,180 --> 00:26:51,310 So now let's return to the condition 568 00:26:51,310 --> 00:26:53,110 for profit maximization. 569 00:26:53,110 --> 00:26:55,180 We said that marginal revenue can 570 00:26:55,180 --> 00:26:59,200 be rewritten as price times 1 plus 1 571 00:26:59,200 --> 00:27:03,910 over the elasticity of demand, right? 572 00:27:03,910 --> 00:27:06,145 That equals marginal cost. 573 00:27:09,250 --> 00:27:14,330 So we can rewrite this as marginal cost over price 574 00:27:14,330 --> 00:27:20,110 equals 1 plus 1 over the elasticity of demand. 575 00:27:20,110 --> 00:27:23,680 And this is the monopolist's market power condition. 576 00:27:23,680 --> 00:27:25,400 So if we define the market-- 577 00:27:25,400 --> 00:27:27,775 so we can define something we call a markup. 578 00:27:30,280 --> 00:27:32,500 Casually we can call it profits, but technically it's 579 00:27:32,500 --> 00:27:37,250 the markup, OK, as the percentage markup 580 00:27:37,250 --> 00:27:40,640 a monopolist can make as p minus MC 581 00:27:40,640 --> 00:27:45,810 over p, how much of the price is actually a markup over cost? 582 00:27:45,810 --> 00:27:47,640 It's sort of an intuitive concept. 583 00:27:47,640 --> 00:27:49,440 So basically, how much of the money 584 00:27:49,440 --> 00:27:53,110 you get for the unit is a markup as a share of the money you 585 00:27:53,110 --> 00:27:55,020 get? 586 00:27:55,020 --> 00:28:00,480 Then that is simply-- that is equal to minus 1 587 00:28:00,480 --> 00:28:03,590 over the elasticity of demand. 588 00:28:03,590 --> 00:28:07,810 So the monopolist markup is equal to 1 over-- minus 1 589 00:28:07,810 --> 00:28:11,490 over the elasticity of demand. 590 00:28:11,490 --> 00:28:14,720 So if the elasticity of demand is negative infinity, 591 00:28:14,720 --> 00:28:17,440 that is a perfectly competitive market. 592 00:28:17,440 --> 00:28:19,510 Then the markup is what? 593 00:28:19,510 --> 00:28:22,140 0, just like a competitive firm. 594 00:28:22,140 --> 00:28:26,630 Competitive firms have to charge marginal cost. 595 00:28:26,630 --> 00:28:29,630 But as demand gets more inelastic 596 00:28:29,630 --> 00:28:32,960 the monopolist gains power to mark up the price 597 00:28:32,960 --> 00:28:33,620 and make money. 598 00:28:36,150 --> 00:28:38,790 And this answers our question of why monopolists 599 00:28:38,790 --> 00:28:40,320 aren't infinitely powerful. 600 00:28:40,320 --> 00:28:42,660 What is the limiting factor of monopolists? 601 00:28:42,660 --> 00:28:45,400 It's not other firms producing their good. 602 00:28:45,400 --> 00:28:47,150 What's the limiting factor on monopolists? 603 00:28:47,150 --> 00:28:47,770 Yeah? 604 00:28:47,770 --> 00:28:50,187 AUDIENCE: How much more will they compete with [INAUDIBLE] 605 00:28:50,187 --> 00:28:52,610 JONATHAN GRUBER: Yeah, it's other products. 606 00:28:52,610 --> 00:28:56,515 So think about a monopolist in insulin. 607 00:28:56,515 --> 00:28:57,890 They can charge whatever the hell 608 00:28:57,890 --> 00:29:01,550 they want, right, because basically there's nothing else 609 00:29:01,550 --> 00:29:02,637 to buy. 610 00:29:02,637 --> 00:29:04,220 Well, maybe multiple insulin products, 611 00:29:04,220 --> 00:29:07,460 but imagine one insulin product, OK? 612 00:29:07,460 --> 00:29:09,170 So nothing constrains the monopolist. 613 00:29:09,170 --> 00:29:10,878 He should charge an infinite price up to, 614 00:29:10,878 --> 00:29:13,820 like, what Congress will put up with, OK? 615 00:29:13,820 --> 00:29:16,040 But if you think about a monopolist in a good 616 00:29:16,040 --> 00:29:21,820 where there's a substitute-- so if I'm the monopolist in gum, 617 00:29:21,820 --> 00:29:24,740 if I'm a gum-opolist, OK, then I'm 618 00:29:24,740 --> 00:29:26,330 constrained by how much people want 619 00:29:26,330 --> 00:29:30,140 to-- eventually people just substitute the candy, OK? 620 00:29:30,140 --> 00:29:32,120 Anything-- so I'm constrained not 621 00:29:32,120 --> 00:29:34,910 by competitors in my market, but by the fact 622 00:29:34,910 --> 00:29:38,250 that consumers can substitute to other goods. 623 00:29:38,250 --> 00:29:39,860 So what's the limit on monopolists? 624 00:29:39,860 --> 00:29:42,830 Consumers, we're the limit on monopolists. 625 00:29:42,830 --> 00:29:45,470 Our willingness to put up with that good relative 626 00:29:45,470 --> 00:29:47,210 to other goods, i.e. 627 00:29:47,210 --> 00:29:50,300 Our elasticity of demand, is the only thing 628 00:29:50,300 --> 00:29:54,300 limiting monopolists, OK? 629 00:29:54,300 --> 00:29:56,952 So basically, there is market discipline to monopolists. 630 00:29:56,952 --> 00:29:58,910 Even though they're the only provider of a good 631 00:29:58,910 --> 00:30:01,040 they're still subject to market discipline. 632 00:30:01,040 --> 00:30:04,010 It's just the discipline doesn't come from other firms, 633 00:30:04,010 --> 00:30:08,360 it comes from consumers, OK? 634 00:30:08,360 --> 00:30:11,150 So a great example of this is let's look, 635 00:30:11,150 --> 00:30:15,350 if you go on-- at least as of last year, if you go on Amazon 636 00:30:15,350 --> 00:30:19,250 and look at the prices of two goods 637 00:30:19,250 --> 00:30:21,230 that you've probably had to consume 638 00:30:21,230 --> 00:30:25,580 in high school, Huckleberry Finn and Great Gatsby, two books 639 00:30:25,580 --> 00:30:27,600 that many of you had to consume in high school. 640 00:30:27,600 --> 00:30:28,975 You had to read Huckleberry Finn, 641 00:30:28,975 --> 00:30:30,890 you had to read Great Gatsby. 642 00:30:30,890 --> 00:30:32,600 They're both comparable lengths-- 643 00:30:32,600 --> 00:30:33,920 Great Gatsby is a little shorter I think, 644 00:30:33,920 --> 00:30:35,120 but they're both comparable lengths. 645 00:30:35,120 --> 00:30:36,920 The production cost-- the marginal cost 646 00:30:36,920 --> 00:30:39,740 to produce them is probably pretty comparable, OK? 647 00:30:39,740 --> 00:30:41,750 But if you go on Amazon, Huck Finn 648 00:30:41,750 --> 00:30:44,735 costs $4 and the Great Gatsby costs $16. 649 00:30:47,340 --> 00:30:49,400 Now why is this? 650 00:30:49,400 --> 00:30:50,720 Why is this, anyone know? 651 00:30:50,720 --> 00:30:53,110 Why does Great Gatsby cost four times as much? 652 00:30:53,110 --> 00:30:55,640 AUDIENCE: [INAUDIBLE] it was banned [INAUDIBLE] 653 00:30:55,640 --> 00:30:57,140 JONATHAN GRUBER: That's interesting. 654 00:30:57,140 --> 00:30:58,380 That's not enough to explain. 655 00:30:58,380 --> 00:30:59,360 It's not banned in enough places, 656 00:30:59,360 --> 00:31:00,860 fortunately, to explain that. 657 00:31:00,860 --> 00:31:03,540 What else is going on, anyone know? 658 00:31:03,540 --> 00:31:05,648 Yeah, in the red shirt, yeah? 659 00:31:05,648 --> 00:31:07,690 AUDIENCE: [INAUDIBLE] competitive-- it has, like, 660 00:31:07,690 --> 00:31:09,148 has no copyright infringement. 661 00:31:09,148 --> 00:31:10,190 JONATHAN GRUBER: Exactly. 662 00:31:10,190 --> 00:31:13,370 The Great Gatsby still has copyright protection. 663 00:31:13,370 --> 00:31:16,940 That is, only people who get permission from the great-- 664 00:31:16,940 --> 00:31:21,370 from William Scott Fitzgerald's descendants-- 665 00:31:21,370 --> 00:31:26,290 F. Scott Fitzgerald, I'm sorry, descendents get to produce it. 666 00:31:26,290 --> 00:31:31,260 They have a monopoly on the good that is The Great Gatsby. 667 00:31:31,260 --> 00:31:36,150 Huck Finn, it turns out that 75 years after an author's death 668 00:31:36,150 --> 00:31:38,940 copyright protection expires. 669 00:31:38,940 --> 00:31:41,640 F. Scott Fitzgerald hasn't been dead for 75 years, 670 00:31:41,640 --> 00:31:43,250 Mark Twain has. 671 00:31:43,250 --> 00:31:45,300 So Huck Finn can now be produced by anyone. 672 00:31:45,300 --> 00:31:47,592 You can go out tomorrow and produce a copy of Huck Finn 673 00:31:47,592 --> 00:31:49,190 and sell it. 674 00:31:49,190 --> 00:31:52,190 So we think probably Huck Finn should be produced 675 00:31:52,190 --> 00:31:54,500 in a pretty competitive market. 676 00:31:54,500 --> 00:31:56,450 That is, basically the $4 you pay 677 00:31:56,450 --> 00:31:58,992 for Huck Finn should be roughly the cost of producing a book. 678 00:31:58,992 --> 00:32:00,742 OK, now no market's perfectly competitive, 679 00:32:00,742 --> 00:32:02,300 a little markup but not much. 680 00:32:02,300 --> 00:32:06,070 Whereas The Great Gatsby, it's not limited by competition. 681 00:32:06,070 --> 00:32:07,820 But it is limited by the fact that if they 682 00:32:07,820 --> 00:32:09,920 try to charge $500 for Great Gatsby 683 00:32:09,920 --> 00:32:12,830 teachers would assign something else, OK? 684 00:32:12,830 --> 00:32:13,790 There's still a limit. 685 00:32:13,790 --> 00:32:16,100 It's only $16, that's not a whole lot for one 686 00:32:16,100 --> 00:32:18,770 of the great works of literature, OK? 687 00:32:18,770 --> 00:32:19,670 It's still only $16. 688 00:32:19,670 --> 00:32:21,200 So why is it only $16? 689 00:32:21,200 --> 00:32:22,783 Because it's limited by the fact there 690 00:32:22,783 --> 00:32:25,490 are other great works of literature people can turn to. 691 00:32:25,490 --> 00:32:27,660 So Huck Finn is limited by the competition 692 00:32:27,660 --> 00:32:30,030 within the market for the-- 693 00:32:30,030 --> 00:32:32,170 across producers producing some homogeneous good. 694 00:32:32,170 --> 00:32:34,260 It's probably a pretty close to the competitive market, right? 695 00:32:34,260 --> 00:32:36,910 It's pretty easy to just set up a shop and produce Huck Finn, 696 00:32:36,910 --> 00:32:39,432 whereas The Great Gatsby has this extra effect which 697 00:32:39,432 --> 00:32:40,890 is copyright protected, so its only 698 00:32:40,890 --> 00:32:42,830 limited by the elasticity of demand. 699 00:32:42,830 --> 00:32:44,742 Yeah? 700 00:32:44,742 --> 00:32:47,080 AUDIENCE: [INAUDIBLE] be like, [INAUDIBLE] like, 701 00:32:47,080 --> 00:32:49,580 the effect of, like, when you increase price again, and even 702 00:32:49,580 --> 00:32:51,910 more with piracy, in a sense? 703 00:32:51,910 --> 00:32:54,510 Like, if, like, when you have, like, a really, like, expensive 704 00:32:54,510 --> 00:32:56,820 good it leaves, like, more incentive to steal? 705 00:32:56,820 --> 00:32:57,640 JONATHAN GRUBER: That's a great point. 706 00:32:57,640 --> 00:32:58,620 So the elasticity of demand, I should 707 00:32:58,620 --> 00:33:00,360 say the elasticity of demand for that good, 708 00:33:00,360 --> 00:33:02,860 where one of the substitutes could be an illegal substitute. 709 00:33:02,860 --> 00:33:04,280 That's a good point. 710 00:33:04,280 --> 00:33:06,960 OK, so let's go on and talk about the next topic 711 00:33:06,960 --> 00:33:10,803 I want to cover today, which is how do we-- because now we 712 00:33:10,803 --> 00:33:12,720 have a new set of tools we've developed that's 713 00:33:12,720 --> 00:33:15,600 really cool which lets us ask the question, 714 00:33:15,600 --> 00:33:19,380 not just what do monopolies do, but how do we feel about it? 715 00:33:19,380 --> 00:33:22,350 That is, we can now turn to talking about the welfare 716 00:33:22,350 --> 00:33:24,860 effects of monopoly. 717 00:33:24,860 --> 00:33:26,570 What are the welfare effects of monopoly? 718 00:33:26,570 --> 00:33:30,260 How do we feel about monopoly? 719 00:33:30,260 --> 00:33:32,760 Well, let's start with the standard case, 720 00:33:32,760 --> 00:33:34,760 that is the case we've covered so far as opposed 721 00:33:34,760 --> 00:33:38,000 to a case I'll cover in a minute, OK? 722 00:33:38,000 --> 00:33:42,230 And let's look at figure 11-5, which 723 00:33:42,230 --> 00:33:47,450 is the example we just solved for, the example where demand 724 00:33:47,450 --> 00:33:53,420 equals 24 minus Q and cost is 12 plus Q squared. 725 00:33:53,420 --> 00:33:54,980 So here we sh-- 726 00:33:54,980 --> 00:33:56,210 once again what do we do? 727 00:33:56,210 --> 00:33:58,980 We set marginal cost equal to marginal revenue. 728 00:33:58,980 --> 00:34:01,070 So they sell 6 units. 729 00:34:01,070 --> 00:34:03,620 We then say, what price permits them to sell 6 units? 730 00:34:03,620 --> 00:34:05,360 The price of 18. 731 00:34:05,360 --> 00:34:08,060 So the equilibrium is at a price of-- 732 00:34:08,060 --> 00:34:12,500 is that e little m, little m for monopoly, OK? 733 00:34:12,500 --> 00:34:17,350 They sell 6 units at a price of 18. 734 00:34:17,350 --> 00:34:20,620 Well at that equilibrium, what's consumer surplus? 735 00:34:20,620 --> 00:34:25,300 It's A, the area under the demand curve, above the price. 736 00:34:25,300 --> 00:34:30,400 So consumer surplus is area A. What's producer surplus? 737 00:34:30,400 --> 00:34:35,949 It's B plus D, the area below the price above the supply 738 00:34:35,949 --> 00:34:37,870 curve, but only for the units that are sold. 739 00:34:40,389 --> 00:34:46,929 So the consumer gets A, the producer gets B plus D, OK? 740 00:34:46,929 --> 00:34:51,940 But C plus E is not our units that 741 00:34:51,940 --> 00:34:55,179 are not sold for which the marginal-- for which 742 00:34:55,179 --> 00:34:59,040 the willingness to pay is above the willingness to supply. 743 00:34:59,040 --> 00:35:01,122 And what do we call those units? 744 00:35:01,122 --> 00:35:03,205 Units that are not sold-- someone raise their hand 745 00:35:03,205 --> 00:35:03,880 and tell me-- 746 00:35:03,880 --> 00:35:06,213 units that are not sold for which the willingness to pay 747 00:35:06,213 --> 00:35:08,220 is above the willingness to supply? 748 00:35:08,220 --> 00:35:09,050 Yeah? 749 00:35:09,050 --> 00:35:09,390 AUDIENCE: [INAUDIBLE] 750 00:35:09,390 --> 00:35:10,307 JONATHAN GRUBER: Loss. 751 00:35:10,307 --> 00:35:12,670 Those are units, that's an inefficiency. 752 00:35:12,670 --> 00:35:17,560 Those units that are not sold that efficiently should be. 753 00:35:17,560 --> 00:35:19,180 That is, we've broken-- 754 00:35:19,180 --> 00:35:20,720 this our first example ever. 755 00:35:20,720 --> 00:35:23,620 This is a super exciting moment of breaking 756 00:35:23,620 --> 00:35:25,928 the first fundamental theorem of welfare economics. 757 00:35:25,928 --> 00:35:27,970 The first fundamental theory of welfare economics 758 00:35:27,970 --> 00:35:32,800 was that the equilibrium, the competitive equilibrium 759 00:35:32,800 --> 00:35:34,150 maximizes welfare. 760 00:35:34,150 --> 00:35:35,980 Well, that's no longer true. 761 00:35:35,980 --> 00:35:40,410 Here we have an equilibrium that comes out of competition. 762 00:35:40,410 --> 00:35:43,830 It's what the market delivers, but it 763 00:35:43,830 --> 00:35:45,487 doesn't maximize welfare. 764 00:35:45,487 --> 00:35:47,070 There's a dead weight loss, and that's 765 00:35:47,070 --> 00:35:49,100 because the market's imperfectly competitive. 766 00:35:49,100 --> 00:35:51,060 This is our first ever example of what 767 00:35:51,060 --> 00:35:54,980 we call a market failure. 768 00:35:58,658 --> 00:36:00,200 And that's what, from my perspective, 769 00:36:00,200 --> 00:36:01,735 makes economics fun. 770 00:36:01,735 --> 00:36:03,110 If there were no market failures, 771 00:36:03,110 --> 00:36:05,690 if all markets functioned the way we said they function, then 772 00:36:05,690 --> 00:36:08,065 basically we could have been largely done with the course 773 00:36:08,065 --> 00:36:09,613 by now. 774 00:36:09,613 --> 00:36:11,030 What makes this all interesting is 775 00:36:11,030 --> 00:36:12,822 markets don't function the way we said they 776 00:36:12,822 --> 00:36:14,600 function in that extreme case. 777 00:36:14,600 --> 00:36:17,840 And therefore, a market failure is 778 00:36:17,840 --> 00:36:22,070 defined as a case where the market equilibrium does not 779 00:36:22,070 --> 00:36:24,510 maximize social welfare. 780 00:36:24,510 --> 00:36:26,780 So whenever the market equilibrium 781 00:36:26,780 --> 00:36:29,300 does not maximize social welfare, 782 00:36:29,300 --> 00:36:31,960 you've got a market failure. 783 00:36:31,960 --> 00:36:33,788 In the perfectly competitive case 784 00:36:33,788 --> 00:36:36,080 we didn't have a failure because the market equilibrium 785 00:36:36,080 --> 00:36:37,480 maximized welfare. 786 00:36:37,480 --> 00:36:39,130 That's not true here. 787 00:36:39,130 --> 00:36:42,370 Now the market equilibrium does not maximize welfare. 788 00:36:42,370 --> 00:36:44,680 Therefore, it's a market failure. 789 00:36:44,680 --> 00:36:46,480 Hint, what's exciting about that to me 790 00:36:46,480 --> 00:36:49,235 is that means there might be a potential role for policy, OK? 791 00:36:49,235 --> 00:36:50,860 So far in this course, the government's 792 00:36:50,860 --> 00:36:51,740 just been a bad guy. 793 00:36:51,740 --> 00:36:53,990 Its done nothing but set mean minimum wages and things 794 00:36:53,990 --> 00:36:56,020 like that, and terrible price ceilings. 795 00:36:56,020 --> 00:36:57,520 But in fact, as we'll see next time, 796 00:36:57,520 --> 00:36:59,687 this starts to introduce the role for the government 797 00:36:59,687 --> 00:37:01,180 as a good guy, OK? 798 00:37:01,180 --> 00:37:04,500 Now, what makes-- to drive this situation home, 799 00:37:04,500 --> 00:37:08,730 make this more interesting, let's contrast that to the more 800 00:37:08,730 --> 00:37:12,180 realistic case of price discrimination, 801 00:37:12,180 --> 00:37:15,900 or potentially more realistic case of price discrimination. 802 00:37:15,900 --> 00:37:19,560 Now what happens if we don't force the monopolist 803 00:37:19,560 --> 00:37:21,780 to only charge one price? 804 00:37:21,780 --> 00:37:25,530 What if we allow the monopolist to charge different prices 805 00:37:25,530 --> 00:37:28,880 to different consumers? 806 00:37:28,880 --> 00:37:30,440 Here's a cool conclusion actually, 807 00:37:30,440 --> 00:37:32,620 kind of crazy conclusion. 808 00:37:32,620 --> 00:37:36,468 If monopolists can perfectly price discriminate, 809 00:37:36,468 --> 00:37:38,260 that is that they can sell a separate price 810 00:37:38,260 --> 00:37:43,710 for every consumer, then monopoly is welfare maximizing. 811 00:37:43,710 --> 00:37:46,270 If monopolists can set a perfect price for every consumer, 812 00:37:46,270 --> 00:37:49,580 then monopoly does maximize social welfare. 813 00:37:49,580 --> 00:37:51,680 To see that, simply look at figure 11-6. 814 00:37:55,690 --> 00:37:59,980 Now let's take a perfectly price discriminating monopolist. 815 00:37:59,980 --> 00:38:03,190 Let's think about what-- this prices they've set. 816 00:38:03,190 --> 00:38:08,115 Well, essentially what they're going to do is set price where? 817 00:38:08,115 --> 00:38:09,490 A price discriminating monopolist 818 00:38:09,490 --> 00:38:13,000 is going to set the price for each unit to what? 819 00:38:13,000 --> 00:38:13,845 Yeah? 820 00:38:13,845 --> 00:38:14,720 AUDIENCE: The demand. 821 00:38:14,720 --> 00:38:16,580 JONATHAN GRUBER: The demand, the willingness to pay. 822 00:38:16,580 --> 00:38:18,320 If you're perfectly price discriminating, 823 00:38:18,320 --> 00:38:20,840 you will screw consumers to the max. 824 00:38:20,840 --> 00:38:22,010 And how do you do that? 825 00:38:22,010 --> 00:38:25,870 By delivering them no surplus. 826 00:38:25,870 --> 00:38:28,040 By taking all the surplus for yourself. 827 00:38:28,040 --> 00:38:31,450 So for the first unit, you charge 5. 828 00:38:31,450 --> 00:38:33,010 For the second unit, you charge 4. 829 00:38:33,010 --> 00:38:36,240 And for the sixth unit you charge 18. 830 00:38:36,240 --> 00:38:39,660 Now, the [INAUDIBLE]---- now the previous monopolist stopped 831 00:38:39,660 --> 00:38:40,620 at 6. 832 00:38:40,620 --> 00:38:42,000 Why do he stop at 6? 833 00:38:42,000 --> 00:38:45,240 Because the sale of the seventh unit would have lost him money. 834 00:38:45,240 --> 00:38:47,670 He would've had to lower the price on all previous units. 835 00:38:47,670 --> 00:38:49,170 But the price [INAUDIBLE] monopolist 836 00:38:49,170 --> 00:38:51,060 has no poisoning effect because he 837 00:38:51,060 --> 00:38:53,880 doesn't have to lower the price on the previous units. 838 00:38:53,880 --> 00:38:55,650 He can say for that seventh unit, 839 00:38:55,650 --> 00:38:59,325 I'm going to sell that one at 17. 840 00:38:59,325 --> 00:39:00,700 I'm going to make 17, and I'm not 841 00:39:00,700 --> 00:39:02,242 going to lose any money because I can 842 00:39:02,242 --> 00:39:04,410 keep the other prices the same. 843 00:39:04,410 --> 00:39:06,580 So with a perfectly price discriminating monopolist, 844 00:39:06,580 --> 00:39:08,000 you get rid of the poisoning effect. 845 00:39:08,000 --> 00:39:10,200 They can just march their way down the demand curve, 846 00:39:10,200 --> 00:39:13,110 charging every consumer exactly their willingness to pay. 847 00:39:13,110 --> 00:39:15,390 Therefore, they will continue to produce 848 00:39:15,390 --> 00:39:17,400 until the competitive equilibrium. 849 00:39:17,400 --> 00:39:19,650 They will continue to produce until willingness to pay 850 00:39:19,650 --> 00:39:21,150 equals willingness to supply. 851 00:39:21,150 --> 00:39:23,500 But they will capture all the surplus. 852 00:39:23,500 --> 00:39:25,830 So the new equilibrium will be EC, 853 00:39:25,830 --> 00:39:29,070 the competitive equilibrium, but the entire surplus 854 00:39:29,070 --> 00:39:31,870 goes to the monopolist. 855 00:39:31,870 --> 00:39:33,940 So the fascinating case, there's-- 856 00:39:33,940 --> 00:39:36,910 we maximize social welfare, but only because we 857 00:39:36,910 --> 00:39:39,070 define social welfare in this particular way, 858 00:39:39,070 --> 00:39:42,700 which is the simple sum of consumer producer surplus. 859 00:39:42,700 --> 00:39:44,920 Here, producers get all the surplus, 860 00:39:44,920 --> 00:39:47,790 therefore welfare is maximized. 861 00:39:47,790 --> 00:39:50,580 So a perfectly price discriminating monopolist, 862 00:39:50,580 --> 00:39:55,650 OK, gets maximized social welfare, OK? 863 00:39:55,650 --> 00:39:58,530 Now, there's two interesting points to come out of this. 864 00:39:58,530 --> 00:40:01,980 Point one is this is a cool way to understand 865 00:40:01,980 --> 00:40:05,557 why there's a dead weight loss for monopoly. 866 00:40:05,557 --> 00:40:07,390 It's cool to understand because you can see- 867 00:40:07,390 --> 00:40:10,015 you can focus on that point E sub M and think about why 868 00:40:10,015 --> 00:40:12,640 the perfectly price [INAUDIBLE] monopolist gets to sell another 869 00:40:12,640 --> 00:40:14,650 unit and the regular monopolist doesn't. 870 00:40:14,650 --> 00:40:17,258 Because the regular monopolist has the poising effect 871 00:40:17,258 --> 00:40:19,300 and the perfectly price discriminating monopolist 872 00:40:19,300 --> 00:40:19,972 does not. 873 00:40:19,972 --> 00:40:21,430 So it's a good way to sort of think 874 00:40:21,430 --> 00:40:24,210 about that intuition of the poisoning effect. 875 00:40:24,210 --> 00:40:26,430 That's lesson one. 876 00:40:26,430 --> 00:40:29,748 Lesson two is, gee, we may want to talk about definition 877 00:40:29,748 --> 00:40:32,040 of welfare that's not just the sum of consumer producer 878 00:40:32,040 --> 00:40:33,920 surplus. 879 00:40:33,920 --> 00:40:36,720 A model of welfare that delivers the fact that a producer that 880 00:40:36,720 --> 00:40:39,360 can screw every single consumer out of any of their surplus 881 00:40:39,360 --> 00:40:41,430 is the best possible outcome might not 882 00:40:41,430 --> 00:40:44,460 be a model we're so happy with, OK? 883 00:40:44,460 --> 00:40:46,140 But that we can come back to. 884 00:40:46,140 --> 00:40:48,350 But for now it's a nice extreme. 885 00:40:48,350 --> 00:40:51,060 And in fact, in reality no firm is perfectly 886 00:40:51,060 --> 00:40:53,320 price discriminating, OK? 887 00:40:53,320 --> 00:40:55,022 Amazon tried to be. 888 00:40:55,022 --> 00:40:56,730 There was a controversy a number of years 889 00:40:56,730 --> 00:41:00,810 ago where Amazon would set your price according to your-- 890 00:41:00,810 --> 00:41:03,930 what's the little, the string of numbers address, IP address. 891 00:41:03,930 --> 00:41:07,590 They literally would set prices by IP address. 892 00:41:07,590 --> 00:41:09,330 They'd literally say, well you know, 893 00:41:09,330 --> 00:41:12,060 you're coming from an IP address that's, for example, you're 894 00:41:12,060 --> 00:41:13,192 in a high-high income area. 895 00:41:13,192 --> 00:41:14,400 I'm going to charge you more. 896 00:41:14,400 --> 00:41:15,720 You're in a university, therefore 897 00:41:15,720 --> 00:41:17,053 you need this book for a course. 898 00:41:17,053 --> 00:41:19,620 Therefore, I'm going to charge you more, et cetera. 899 00:41:19,620 --> 00:41:22,890 That, they got busted and that was found illegal. 900 00:41:22,890 --> 00:41:25,650 But just because you can't perfectly price discriminate 901 00:41:25,650 --> 00:41:30,000 doesn't mean we don't have lots of examples of partial price 902 00:41:30,000 --> 00:41:30,700 discrimination. 903 00:41:30,700 --> 00:41:33,325 So what are examples in the real world of price discrimination? 904 00:41:33,325 --> 00:41:34,680 What do firms do? 905 00:41:34,680 --> 00:41:37,240 And what's the general-- let me ask, tell me what firms do. 906 00:41:37,240 --> 00:41:39,240 And also I wonder, what's the general principle? 907 00:41:39,240 --> 00:41:41,273 What's the basic idea that firms-- 908 00:41:41,273 --> 00:41:42,690 if you want to price discriminate, 909 00:41:42,690 --> 00:41:44,567 what do you want to figure out? 910 00:41:44,567 --> 00:41:45,900 What is your goal to figure out? 911 00:41:45,900 --> 00:41:46,650 Yeah. 912 00:41:46,650 --> 00:41:48,880 AUDIENCE: Isn't [INAUDIBLE] make airplanes? 913 00:41:48,880 --> 00:41:49,755 JONATHAN GRUBER: [INAUDIBLE] the what? 914 00:41:49,755 --> 00:41:50,190 AUDIENCE: Airplanes. 915 00:41:50,190 --> 00:41:50,640 JONATHAN GRUBER: Airplanes. 916 00:41:50,640 --> 00:41:51,303 So explain. 917 00:41:51,303 --> 00:41:52,720 AUDIENCE: Because if know somebody 918 00:41:52,720 --> 00:41:54,510 is buying a ticket, like, two days before a flight, 919 00:41:54,510 --> 00:41:55,386 it's probably for a business trip 920 00:41:55,386 --> 00:41:57,130 so they can pay a lot more money. 921 00:41:57,130 --> 00:41:59,630 JONATHAN GRUBER: And why are they willing to pay more money? 922 00:41:59,630 --> 00:42:02,670 AUDIENCE: Um, because the elasticity is-- 923 00:42:02,670 --> 00:42:05,700 JONATHAN GRUBER: The elasticity is low because? 924 00:42:05,700 --> 00:42:07,375 AUDIENCE: Because they have to do it. 925 00:42:07,375 --> 00:42:08,750 JONATHAN GRUBER: They have to go. 926 00:42:08,750 --> 00:42:11,640 If you're going to buy two days before, you got to go. 927 00:42:11,640 --> 00:42:13,613 If you're buying six months before, you know, 928 00:42:13,613 --> 00:42:15,030 you might have to go that day, you 929 00:42:15,030 --> 00:42:16,280 might not have to go that day. 930 00:42:16,280 --> 00:42:18,720 You might have to-- but if you're buying last minute, 931 00:42:18,720 --> 00:42:22,280 you've got to go so your elasticity's lower. 932 00:42:22,280 --> 00:42:24,860 So price discriminating monopolists 933 00:42:24,860 --> 00:42:27,950 look for signals of elasticity. 934 00:42:27,950 --> 00:42:29,570 That's their search. 935 00:42:29,570 --> 00:42:32,030 They can't literally know your willingness to pay. 936 00:42:32,030 --> 00:42:34,280 Amazon tried, but even Amazon couldn't perfectly 937 00:42:34,280 --> 00:42:35,790 know your willingness to pay. 938 00:42:35,790 --> 00:42:39,200 So they're looking for signals that are correlated 939 00:42:39,200 --> 00:42:40,700 with your willingness to pay. 940 00:42:40,700 --> 00:42:44,098 One signal is whether you want to fly at the last minute. 941 00:42:44,098 --> 00:42:45,640 That means you have a low elasticity. 942 00:42:45,640 --> 00:42:47,015 You're screwed, you've got to go. 943 00:42:47,015 --> 00:42:48,910 What's another thing airlines do? 944 00:42:48,910 --> 00:42:52,910 What's another signal of elasticity the airlines use? 945 00:42:52,910 --> 00:42:53,990 How else-- yeah. 946 00:42:53,990 --> 00:42:56,600 AUDIENCE: How long have you been on the website? 947 00:42:56,600 --> 00:42:57,080 JONATHAN GRUBER: They don't-- 948 00:42:57,080 --> 00:42:58,640 I don't know if they actually use that, how long you 949 00:42:58,640 --> 00:42:59,240 been on the website. 950 00:42:59,240 --> 00:43:00,700 They could, that would be kind of interesting. 951 00:43:00,700 --> 00:43:01,840 AUDIENCE: [INAUDIBLE] 952 00:43:01,840 --> 00:43:02,950 JONATHAN GRUBER: Yeah, I don't know. 953 00:43:02,950 --> 00:43:04,280 But that, that's pretty subtle. 954 00:43:04,280 --> 00:43:08,050 What's a more blunt one they used even before websites? 955 00:43:08,050 --> 00:43:08,680 Yeah? 956 00:43:08,680 --> 00:43:09,730 AUDIENCE: Search history? 957 00:43:09,730 --> 00:43:11,290 JONATHAN GRUBER: No, even before search-- 958 00:43:11,290 --> 00:43:12,370 I know you guys grew up with internet 959 00:43:12,370 --> 00:43:14,070 but there was life before the internet. 960 00:43:14,070 --> 00:43:16,090 And even before the internet, airlines price discriminated. 961 00:43:16,090 --> 00:43:17,110 What did they-- what did they do? 962 00:43:17,110 --> 00:43:17,860 In the back, yeah. 963 00:43:17,860 --> 00:43:19,060 AUDIENCE: You have, like business class and-- 964 00:43:19,060 --> 00:43:21,435 JONATHAN GRUBER: Yeah, different levels of flight, right? 965 00:43:21,435 --> 00:43:24,130 Why is a first class ticket more than a coach ticket? 966 00:43:24,130 --> 00:43:27,998 Because rich guys are less elastic than poor guys. 967 00:43:27,998 --> 00:43:30,040 So basically, another way of price discriminating 968 00:43:30,040 --> 00:43:33,730 within the same flight is by having different quality. 969 00:43:33,730 --> 00:43:35,590 So what they do is they say, we're 970 00:43:35,590 --> 00:43:37,390 going to give you a higher quality product, 971 00:43:37,390 --> 00:43:41,120 but look, first class business-- so I flew business class 972 00:43:41,120 --> 00:43:42,370 for the first time in my life. 973 00:43:42,370 --> 00:43:42,880 I was very exciting. 974 00:43:42,880 --> 00:43:44,505 I went to India, I flew business class. 975 00:43:44,505 --> 00:43:45,940 It was awesome. 976 00:43:45,940 --> 00:43:49,730 But it raised the price of the ticket from $1,000 to $2,500. 977 00:43:49,730 --> 00:43:54,530 Now, it was better but it wasn't $1,500 better. 978 00:43:54,530 --> 00:43:56,870 Or [INAUDIBLE] put this, let me rephrase that. 979 00:43:56,870 --> 00:43:59,790 It cost more, but it's certainly didn't cost $1,500 more. 980 00:43:59,790 --> 00:44:01,210 I got a bigger seat, and like, you 981 00:44:01,210 --> 00:44:02,750 know, people slaved over me. 982 00:44:02,750 --> 00:44:05,620 But like, it certainly did not cost them $1,500 983 00:44:05,620 --> 00:44:06,620 to provide that service. 984 00:44:06,620 --> 00:44:09,830 They clearly made more of a markup on the business class 985 00:44:09,830 --> 00:44:12,350 seat than they did in the coach seat 986 00:44:12,350 --> 00:44:13,620 because I was less elastic. 987 00:44:13,620 --> 00:44:14,120 Why? 988 00:44:14,120 --> 00:44:16,200 Because someone else was paying for my flight, 989 00:44:16,200 --> 00:44:17,360 OK, so as less elastic. 990 00:44:17,360 --> 00:44:19,763 And that's-- if you talk to people in business class, 991 00:44:19,763 --> 00:44:21,680 none of them are paying for their own flights. 992 00:44:21,680 --> 00:44:24,822 They're either super rich or their company's paying, OK? 993 00:44:24,822 --> 00:44:26,780 So the bottom line, that's another way airlines 994 00:44:26,780 --> 00:44:27,100 [INAUDIBLE]. 995 00:44:27,100 --> 00:44:28,030 Let's get away from airlines. 996 00:44:28,030 --> 00:44:29,710 What are other examples of price discrimination? 997 00:44:29,710 --> 00:44:30,347 Yeah. 998 00:44:30,347 --> 00:44:32,430 AUDIENCE: Isn't that a common thing, like, Google, 999 00:44:32,430 --> 00:44:34,460 like, [INAUDIBLE] actually use your search history 1000 00:44:34,460 --> 00:44:36,110 and cookies to, like, figure out how much money you make 1001 00:44:36,110 --> 00:44:38,230 and how much you're willing to spend on certain items? 1002 00:44:38,230 --> 00:44:39,250 JONATHAN GRUBER: I think-- 1003 00:44:39,250 --> 00:44:40,208 I have to look this up. 1004 00:44:40,208 --> 00:44:42,100 I think they're not allowed to do that. 1005 00:44:42,100 --> 00:44:44,760 They're allowed to do that in targeting advertising, 1006 00:44:44,760 --> 00:44:47,135 but I don't know if they're allowed to setting the price. 1007 00:44:47,135 --> 00:44:48,593 I don't know if a company's allowed 1008 00:44:48,593 --> 00:44:50,200 to that setting the price. 1009 00:44:50,200 --> 00:44:51,860 Yeah? 1010 00:44:51,860 --> 00:44:56,180 AUDIENCE: Sometimes chains will be more expensive in cities 1011 00:44:56,180 --> 00:44:57,870 and less expensive in rural areas. 1012 00:44:57,870 --> 00:44:59,440 Like, the same meal at McDonald's can 1013 00:44:59,440 --> 00:45:01,023 cost a different amount depending on-- 1014 00:45:01,023 --> 00:45:02,300 JONATHAN GRUBER: Exactly, or-- 1015 00:45:02,300 --> 00:45:03,320 that's exactly right. 1016 00:45:03,320 --> 00:45:05,910 Restaurants or supermarkets. 1017 00:45:05,910 --> 00:45:10,760 Now here's what's interesting, if you look at a McDonald's, 1018 00:45:10,760 --> 00:45:12,880 OK, its prices-- 1019 00:45:12,880 --> 00:45:14,450 no, it's true for both. 1020 00:45:14,450 --> 00:45:17,270 Basically, if you look like, like if I buy-- 1021 00:45:17,270 --> 00:45:21,220 when I buy McDonald's on the highway out in the suburbs 1022 00:45:21,220 --> 00:45:24,140 it's more expensive than I would buy here in Cambridge. 1023 00:45:24,140 --> 00:45:25,610 Why is that? 1024 00:45:25,610 --> 00:45:27,768 Why is-- why is a big so-- yeah? 1025 00:45:27,768 --> 00:45:29,310 AUDIENCE: Not a lot of other options. 1026 00:45:29,310 --> 00:45:29,670 JONATHAN GRUBER: Yeah. 1027 00:45:29,670 --> 00:45:30,570 I'm like, I'm driving. 1028 00:45:30,570 --> 00:45:31,210 Where am I going to go? 1029 00:45:31,210 --> 00:45:33,630 I can't say, oh, it's too expensive, I'm going next door. 1030 00:45:33,630 --> 00:45:34,770 So that's an example. 1031 00:45:34,770 --> 00:45:39,150 Inner city price-- supermarkets charge much higher prices 1032 00:45:39,150 --> 00:45:41,940 in the city than out of the city. 1033 00:45:41,940 --> 00:45:44,348 Now you might think that's sort of strange, OK? 1034 00:45:44,348 --> 00:45:45,890 But that's because in the city people 1035 00:45:45,890 --> 00:45:46,670 have to walk to get there. 1036 00:45:46,670 --> 00:45:47,650 They don't have a lot of options. 1037 00:45:47,650 --> 00:45:48,900 There's not a lot of shopping. 1038 00:45:48,900 --> 00:45:51,980 Outside, they can drive from supermarket to supermarket, OK? 1039 00:45:51,980 --> 00:45:55,100 So there's all these complicated things that go into it. 1040 00:45:55,100 --> 00:45:57,470 One of my-- let me sort of tell you 1041 00:45:57,470 --> 00:45:59,340 a couple of my favorite examples. 1042 00:45:59,340 --> 00:46:02,325 One of my favorite examples is early bird specials. 1043 00:46:02,325 --> 00:46:03,950 Now you guys might not know about this, 1044 00:46:03,950 --> 00:46:05,950 but you might've hung out with your grandparents 1045 00:46:05,950 --> 00:46:08,270 and known that, like, if you go to a restaurant 1046 00:46:08,270 --> 00:46:11,660 sometimes before 5 o'clock or 5:30, it's cheaper. 1047 00:46:11,660 --> 00:46:15,820 Or if you go to a matinee movie, a movie during the day 1048 00:46:15,820 --> 00:46:18,030 is cheaper than a movie at night. 1049 00:46:18,030 --> 00:46:19,900 Same movie, why? 1050 00:46:19,900 --> 00:46:22,400 Why is a movie during the day cheaper than a movie at night? 1051 00:46:25,400 --> 00:46:25,968 Yeah. 1052 00:46:25,968 --> 00:46:27,426 AUDIENCE: Because in the night time 1053 00:46:27,426 --> 00:46:28,920 you probably want to go to the movies 1054 00:46:28,920 --> 00:46:31,212 more because you're off work and you have things to do. 1055 00:46:31,212 --> 00:46:32,960 And so there's like-- 1056 00:46:32,960 --> 00:46:34,880 like, if you went early you're purposely 1057 00:46:34,880 --> 00:46:36,350 looking for a cheaper option. 1058 00:46:36,350 --> 00:46:37,440 So you [INAUDIBLE]. 1059 00:46:37,440 --> 00:46:38,900 JONATHAN GRUBER: You're more elastic during the day 1060 00:46:38,900 --> 00:46:40,610 because basically you're an old retired person's 1061 00:46:40,610 --> 00:46:42,410 who's got nothing but time in their hands. 1062 00:46:42,410 --> 00:46:44,327 It's like, you can shop around movie theaters, 1063 00:46:44,327 --> 00:46:47,600 you decide to go to movie or take a nap, et cetera. 1064 00:46:47,600 --> 00:46:49,400 Same thing with early dinner specials. 1065 00:46:49,400 --> 00:46:52,070 People who have more time to shop are more elastic. 1066 00:46:52,070 --> 00:46:53,940 At night you're going out to see the movie. 1067 00:46:53,940 --> 00:46:55,275 These are people, you know-- 1068 00:46:55,275 --> 00:46:56,900 in some sense it's sort of interesting. 1069 00:46:56,900 --> 00:46:57,810 You think midnight movies-- 1070 00:46:57,810 --> 00:46:59,600 I don't know if this is true, midnight movies 1071 00:46:59,600 --> 00:47:00,830 should charge and most of all. 1072 00:47:00,830 --> 00:47:02,570 Because that's a bunch of insane fans, right, who 1073 00:47:02,570 --> 00:47:03,743 have to see the movie first. 1074 00:47:03,743 --> 00:47:06,160 It seems like the midnight showing should charge the most. 1075 00:47:06,160 --> 00:47:06,780 I don't know if that's true. 1076 00:47:06,780 --> 00:47:08,550 That would be interesting to look at. 1077 00:47:08,550 --> 00:47:09,990 OK, that's one example. 1078 00:47:09,990 --> 00:47:12,500 Another example I love is Disneyland. 1079 00:47:12,500 --> 00:47:15,320 Disneyland and Disney World charge less 1080 00:47:15,320 --> 00:47:18,770 if you live within 20 or so miles of the park. 1081 00:47:18,770 --> 00:47:20,863 Why? 1082 00:47:20,863 --> 00:47:22,030 Because you can go whenever. 1083 00:47:22,030 --> 00:47:24,420 So when I took my kids to Disney World, if I went up and said, 1084 00:47:24,420 --> 00:47:26,378 I'm sorry kids, it was $10 more than I thought, 1085 00:47:26,378 --> 00:47:29,500 we're not going, I would have had a riot on my hands. 1086 00:47:29,500 --> 00:47:31,202 Once you're there, you're inelastic. 1087 00:47:31,202 --> 00:47:32,410 You're going to Disney World. 1088 00:47:32,410 --> 00:47:33,993 There's nothing else to do in Orlando. 1089 00:47:33,993 --> 00:47:36,280 I mean, but there's other parks, I guess. 1090 00:47:36,280 --> 00:47:38,200 But like, but if you live locally you can 1091 00:47:38,200 --> 00:47:40,570 decide whether to go or not. 1092 00:47:40,570 --> 00:47:43,450 And then probably the most interesting recent example 1093 00:47:43,450 --> 00:47:45,710 is Tesla. 1094 00:47:45,710 --> 00:47:48,430 So during-- I feel like, did I tell you guys the Tesla 1095 00:47:48,430 --> 00:47:49,990 hurricane story yet? 1096 00:47:49,990 --> 00:47:50,990 I don't think so, right? 1097 00:47:50,990 --> 00:47:53,160 OK, so during the hurricane in Florida-- 1098 00:47:53,160 --> 00:47:55,190 Irma, I guess it was? 1099 00:47:55,190 --> 00:48:00,350 In Florida, Tesla-- so Tesla so two cars, two models, 1100 00:48:00,350 --> 00:48:03,350 the cheaper model and the more expensive model. 1101 00:48:03,350 --> 00:48:05,780 And the more expensive model had some nice doodads, 1102 00:48:05,780 --> 00:48:09,020 but most importantly the battery lasted longer. 1103 00:48:09,020 --> 00:48:11,060 The cheaper model was like 300 miles, 1104 00:48:11,060 --> 00:48:13,610 the more expensive model was like 500 miles. 1105 00:48:13,610 --> 00:48:19,460 During hurricane Irma, Tesla as a gesture of goodwill said, 1106 00:48:19,460 --> 00:48:21,740 hey guys who drive the cheap car, 1107 00:48:21,740 --> 00:48:23,720 you can now drive 500 miles. 1108 00:48:23,720 --> 00:48:26,420 And they're like, what the hell, it's the same battery? 1109 00:48:26,420 --> 00:48:30,250 Tesla said, well it turns out, it's the same battery. 1110 00:48:30,250 --> 00:48:32,000 The only difference is a piece of software 1111 00:48:32,000 --> 00:48:34,710 that we can turn off or on. 1112 00:48:34,710 --> 00:48:36,920 So why did Tesla do that? 1113 00:48:36,920 --> 00:48:41,810 Why did Tesla have a piece of software they turn off or on 1114 00:48:41,810 --> 00:48:45,230 and turn it off for some people to make them drive less? 1115 00:48:45,230 --> 00:48:46,660 Why did they do that? 1116 00:48:46,660 --> 00:48:47,950 There's someone else involved. 1117 00:48:47,950 --> 00:48:49,592 Can anyone tell me about what Tesla 1118 00:48:49,592 --> 00:48:51,800 thought, meaning besides the, oh, must be an asshole. 1119 00:48:51,800 --> 00:48:52,300 What else? 1120 00:48:52,300 --> 00:48:53,930 What's the other-- what's the kind of-- 1121 00:48:53,930 --> 00:48:55,520 what's Tesla's thought process? 1122 00:48:55,520 --> 00:48:58,270 Actually, it was perfect economics. 1123 00:48:58,270 --> 00:48:58,780 Yeah? 1124 00:48:58,780 --> 00:48:59,300 AUDIENCE: Price discrimination. 1125 00:48:59,300 --> 00:49:00,670 JONATHAN GRUBER: Right, it's price discrimination. 1126 00:49:00,670 --> 00:49:01,697 But how? 1127 00:49:01,697 --> 00:49:04,030 How are you price discriminating by making some people-- 1128 00:49:04,030 --> 00:49:05,170 yeah? 1129 00:49:05,170 --> 00:49:09,018 AUDIENCE: You can make a 500 mile car more expensive. 1130 00:49:09,018 --> 00:49:10,060 JONATHAN GRUBER: Exactly. 1131 00:49:10,060 --> 00:49:11,743 It's like first class. 1132 00:49:11,743 --> 00:49:13,660 You're basically saying, I want to charge more 1133 00:49:13,660 --> 00:49:15,112 for a better product. 1134 00:49:15,112 --> 00:49:16,820 I can't charge more for the same product, 1135 00:49:16,820 --> 00:49:19,840 so if I give everyone 500 miles I can't charge more. 1136 00:49:19,840 --> 00:49:23,950 But by making one product better I can separate demand. 1137 00:49:23,950 --> 00:49:26,620 I can sell the expensive product to the low elasticity of demand 1138 00:49:26,620 --> 00:49:28,480 consumers and the less expensive to the high 1139 00:49:28,480 --> 00:49:29,470 elasticity of demand. 1140 00:49:29,470 --> 00:49:33,370 But it's actually the same damn product, I just did it as a way 1141 00:49:33,370 --> 00:49:35,090 to price discriminate. 1142 00:49:35,090 --> 00:49:37,930 So Tesla, in an effort to be nice, 1143 00:49:37,930 --> 00:49:40,760 screwed themselves by revealing that they had been actually 1144 00:49:40,760 --> 00:49:42,625 falsely screw-- you know screwing consumers. 1145 00:49:42,625 --> 00:49:44,500 It's not [INAUDIBLE]---- it's good economics. 1146 00:49:44,500 --> 00:49:46,190 It makes total sense. 1147 00:49:46,190 --> 00:49:48,950 OK, this actually follows one last example. 1148 00:49:48,950 --> 00:49:52,120 When the first laser printers came out, 1149 00:49:52,120 --> 00:49:54,320 OK, it turned out that you could buy one 1150 00:49:54,320 --> 00:49:57,740 for home that was like half the price one for office. 1151 00:49:57,740 --> 00:49:59,990 And someone took them apart and found the one for home 1152 00:49:59,990 --> 00:50:02,600 was the one for the office plus an extra piece that 1153 00:50:02,600 --> 00:50:03,500 made it go slower. 1154 00:50:06,540 --> 00:50:08,113 And they did that simply because they 1155 00:50:08,113 --> 00:50:10,530 knew the office guys were less price elastic than the home 1156 00:50:10,530 --> 00:50:11,270 guys. 1157 00:50:11,270 --> 00:50:12,810 So they wanted an expensive one-- so they said, 1158 00:50:12,810 --> 00:50:13,810 the office one's faster. 1159 00:50:13,810 --> 00:50:14,580 Isn't this cool? 1160 00:50:14,580 --> 00:50:16,955 It was faster because they didn't add an extra piece that 1161 00:50:16,955 --> 00:50:18,247 made to go slower, OK? 1162 00:50:18,247 --> 00:50:19,330 And that's the same thing. 1163 00:50:19,330 --> 00:50:21,512 So let's stop there, and we'll come back 1164 00:50:21,512 --> 00:50:22,470 and talk more monopoly. 1165 00:50:22,470 --> 00:50:26,310 Good luck tomorrow night and we'll talk more 1166 00:50:26,310 --> 00:50:28,760 about monopoly on Wednesday.