2.8, 2.11 (Micro) Real World: Google (Monopoly): R&D as Positive Production: Paper 1, 2, IAs: Pt 1

Video tutorial for IB Econ students illustrating how to draw, analyze, evaluate a monopoly model & how a dominant firm can reinvest abnormal profits into research and development (R&D), which is a positive production externality
Applications of real world examples for Paper 1, Part B questions. In addition, the content can provide insight for Paper 2 and Internal Assessments.
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Assumptions of a monopoly
Single or dominant large firm in the industry: a single firm producing a good or services for the entire market is called a pure monopoly, thus the firm is the industry; or if a firm controls approximately 80% of the market
Firm is a price maker; demand curve is downward sloping; PED is less than 1 (inelastic); the firm has market power
The firm produces, sells a unique product with no close substitutes (PED is less than 1)
High barriers to entry: economies of scale, branding, legal barriers, control of essential resources, aggressive tactics
Asymmetric information
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Notes on Graph A: Monopoly:
How to draw, at time 4:53
How to analyze, at time 15:39
Graph A: Market for search engine technology: Google
Google as the dominant firm in 31 EEA (European Economic Area) nations with over 90% market share
Antitrust: Commission fines Google €2.42 billion: ec.europa.eu/c...
x-axis measures the quantity
y-axis measures the price, costs, revenue
Marginal Cost curve (MC1) as per law of supply
MC1, which intersects (=) the average total cost (ATC) curve when ATC is at its lowest point (minimum ATC = productive efficiency)
Demand curve: D1 = Marginal Benefit (MB1) in accordance to the law of demand
D1 = Average Revenue (AR1) curve = MB1
PED is less than 1 as the monopoly faces insignificant competition
Marginal Revenue (MR1) is less than AR1 as a result of the firm not price discriminating
In order for the firm to sell another unit when faced with a downward sloping demand (AR) curve, the firm needs to lower price for all units and all consumers, thus decreasing the additional revenue gained when selling another unit of a good
Tutorial on AR greater than MR: • 2.11(Micro)Non-price d...
Assuming the objective of profit maximization the firm produces at MR=MC at quantity Qπmax
MR=MC explanation: • 2.11(Micro) Rational p...
At Qπmax, the firm sets price according to their demand (AR) curve at P1=AR1
*At Qπmax, the firm generates supernormal profit as P1 = AR1 is greater than C1 = ATC1
At Qπmax, the firm is productively inefficient as ATC at Qπmax is greater than minimum ATC
At Qπmax, the firm is allocatively inefficient as MB is greater than MC meaning that there is an underallocation of resources to the production of the good versus what is desired by society
Although monopolies are productively & allocatively inefficient, they can reinvest their abnormal profit into R&D as a positive production externality
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Notes on Graph B: Positive production
How to draw, at time 11:48
How to analyze, at time 18:12
Analysis
Graph B: Google: R&D: Google Maps, Google Glass, Waymo
x-axis measures quantity
y-axis measures the price
S1=MPC (marginal private cost), upward sloping according to the law of supply
MPC= private cost of Google employing resources (labor, capital, etc.) that are excludable and rivalrous to the firm (private goods)
D1=MPB (marginal private benefit)=MSB (marginal social benefit), downward sloping according to the law of demand
MPB= private benefit of the household consuming Google services; household consumption as a private good that is excludable & rivalrous
MSB= social benefit of households consuming Google services; household consumption of Google services does not lead to an assumed welfare loss
S1=D1 (Point A), provides an equilibrium free market price (Pm) & an equilibrium free market quantity (Qm) where Qs=Qd
But, the free market price of Pm does not reflect the total social benefit of R&D into Google Maps, self-driving vehicle tech, etc. (the positive social impacts are not reflected)
Pm=MPC, and does not include MSC (marginal social costs) of production
S2=MSC (Point B), which reflects the quantified social cost of Google R&D
Thus, at Qm, MSB is greater than MSC, generating a welfare loss (shaded area) representing the quantified social benefit of R&D exceeding its social cost
There is an underallocation of resources to the production (development of R&D tech) versus what is desired by society; society would like more versus what is desired
Social optimum would be achieved where MSC=MSB
MSC=MSB provides the socially optimum price of Popt
MSC=MSB provides the socially optimum quantity of Qopt; as a result of an decrease in price from Pm to Popt, Qd would increase from Qm (Point A) to Qopt (Point C)
Thus allocative efficiency would be achieved at MSC=MSB eliminating the free market failure

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Please note: S ≠ MC for firms operating within imperfectly competitive market structures. Thus, the firm's MC curve should be labelled MC only.
* Explanation of why a monopoly has no supply curve:
* Part 1 of 2: ruclips.net/video/BMARdgtcPCE/видео.html
* Part 2 of 2: ruclips.net/video/jOI5HFEpVZo/видео.html

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