Principles of Microeconomics

Monopoly and AntitrustPolicy

Objectives
Define monopoly. Explain the four main reasons monopolies arise. Explain how a monopoly chooses price and output. Use a graph to illustrate how a monopoly affects economic efficiency. Discuss government policies toward monopoly.

ProductDifferentiation
Homogeneousgood Oneseller
Monopoly

Uniquegood (noclose substitutes)

NumberofSellers

Oligopoly

MonopolisticCompetition CompetitiveMarket

ManySellers

FirmsinPerfectlyCompetitiveMarkets

TheFourMarketStructures

MARKET STRUCTURE
CHARACTERISTIC PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY

Number of firms Type of product Ease of entry Examples of industries

Many Identical High Wheat Apples

Many Differentiated High Selling DVDs Restaurants

Few Identical or differentiated Low Manufacturing computers Manufacturing automobiles

One Unique Entry blocked First-class mail delivery Tap water

IsAnyFirmEverReallyaMonopoly?
Monopoly
Afirmthatistheonlysellerofagoodorservice thatdoesnothaveaclosesubstitute. Afirmisamonopolyifitcansetitsownprice. IsXbox360a CloseSubstitute forPlayStation3?
Tomanygamers,PlayStation3isaclosesubstituteforXbox.

WhereDoMonopoliesComeFrom?
Tohaveamonopoly,barrierstoenteringthemarketmustbeso highthatnootherfirmscanenter. Barrierstoentrymaybehighenoughtokeepoutcompeting firmsforfourmainreasons: 1. Governmentblockstheentry ofmorethanonefirmintoa market. 2. Onefirmhascontrolofakeyresourcenecessarytoproducea good. 3. Thereareimportantnetworkexternalities insupplyingthe goodorservice. 4. Economiesofscalearesolargethatonefirmhasanatural monopoly.

WhereDoMonopoliesComeFrom?
EntryBlockedbyGovernmentAction IntheUnitedStates,governmentblocksentryin twomainways: 1. Bygrantingapatent orcopyright toan individualorfirm,givingittheexclusiverightto produceaproduct. 2. Bygrantingafirmapublicfranchise,makingit theexclusivelegalproviderofagoodorservice.

WhereDoMonopoliesComeFrom?
EntryBlockedbyGovernmentAction: PatentsandCopyrights Patent Theexclusiverighttoaproductforaperiodof20yearsfromthe datetheproductisinvented. Copyright Agovernmentgrantedexclusiverighttoproduceandsella creation. PublicFranchises Adesignationbythegovernmentthatafirmistheonlylegal providerofagoodorservice.

WhereDoMonopoliesComeFrom?
ControlofaKeyResource Anotherwayforafirmtobecomeamonopoly isbycontrollingakeyresource.Anexampleis bauxitetoproducealuminium ore. In2007,Australiawasoneofthetop producersofbauxitewithalmostonethird worldshare,followedbyChina,Brazil,Guinea, andJamaica.

WhereDoMonopoliesComeFrom?
Networkexternalities Thesituationwheretheusefulnessofaproduct increaseswiththenumberofconsumerswhouse it. Naturalmonopoly Asituationinwhicheconomiesofscaleareso largethatonefirmcansupplytheentiremarket ataloweraveragetotalcostthancantwoor morefirms.

WhereDoMonopoliesComeFrom?
NaturalMonopoly

AverageTotalCostCurve foraNaturalMonopoly

HowDoesaMonopolyChoosePriceandOutput?
MarginalRevenueOnceAgain Monopoliesarepricemakers.Whenafirmcutsthe priceofaproduct,onegoodthinghappens,andone badthinghappens: Thegoodthing. Itsellsmoreunitsoftheproduct. Thebadthing. Itreceiveslessrevenuefromeachunitthanitwould havereceivedatthehigherprice.

HowDoesaMonopolyChoosePriceandOutput?
MarginalRevenueOnceAgain

CalculatingaMonopolys Revenue

HowDoesaMonopolyChoosePriceandOutput?
ProfitMaximizationforaMonopolist
ProfitMaximizingPriceandOutputforaMonopoly

FindingtheProfitMaximizingPriceandOutputforaMonopolist

PRICE $17 16 15 14 13 12

QUANTITY 3 4 5 6 7 8

TOTAL REVENUE $51 64 75 84 91 96

MARGINAL REVENUE (MR = TR/Q) $13 11 9 7 5

TOTAL COST $56 63 71 80 90 101

MARGINAL COST (MC = TC/Q) $7 8 9 10 11

DontLetThisHappentoYOU!
DontAssumeThatChargingaHigherPriceIs AlwaysMoreProfitableforaMonopolist

DoesMonopolyReduceEconomicEfficiency?
ComparingMonopolyandPerfectCompetition
WhatHappensIfaPerfectlyCompetitive IndustryBecomesaMonopoly?

DoesMonopolyReduceEconomicEfficiency?
MeasuringtheEfficiencyLossesfromMonopoly

TheInefficiencyofMonopoly

DoesMonopolyReduceEconomicEfficiency?
MeasuringtheEfficiencyLossesfromMonopoly

Wecansummarizetheeffectsofmonopolyasfollows: 1 Monopolycausesareductioninconsumer surplus. 2 Monopolycausesanincreaseinproducer surplus. 3 Monopolycausesadeadweightloss,which representsareductionineconomicefficiency.

Learning Objective14.4

DoesMonopolyReduceEconomicEfficiency?
HowLargeAretheEfficiencyLossesDuetoMonopoly?
Remember,Marketpower Istheabilityofafirm tochargeapricegreaterthanmarginalcost.

MarketPowerandTechnologicalChange
Theintroductionofnewproductsrequiresfirmsto spendfundsonresearchanddevelopment. Becausefirmswithmarketpoweraremorelikely toearneconomicprofitsthanareperfectly competitivefirms,theyarealsomorelikelytocarry outresearchanddevelopmentandintroducenew products.

GovernmentPolicytowardMonopoly
Collusion Anagreementamongfirmstochargethe samepriceorotherwisenottocompete.

AntitrustLawsandAntitrustEnforcement
Antitrustlaws Lawsaimedateliminatingcollusionand promotingcompetitionamongfirms.

GovernmentPolicytowardMonopoly
AntitrustLawsandAntitrustEnforcement
ImportantU.S.AntitrustLaws LAW Sherman Act Clayton Act DATE 1890 1914 PURPOSE Prohibited restraint of trade, including price fixing and collusion. Also outlawed monopolization. Prohibited firms from buying stock in competitors and from having directors serve on the boards of competing firms. Established the Federal Trade Commission (FTC) to help administer antitrust laws. Prohibited charging buyers different prices if the result would reduce competition. Toughened restrictions on mergers by prohibiting any mergers that would reduce competition.

Federal Trade Commission Act Robinson-Patman Act Cellar-Kefauver Act

1914 1936 1950

GovernmentPolicytowardMonopoly
Mergers:TheTradeoffbetweenMarketPowerandEfficiency

Horizontalmerger Amergerbetweenfirmsinthesame industry. Verticalmerger Amergerbetweenfirmsatdifferent stagesofproductionofagood.

KeyConcepts
Antitrustlaws Collusion Copyright Horizontalmerger Marketpower Monopoly Naturalmonopoly Networkexternalities Patent Publicfranchise Verticalmerger