Economics R. Glenn Hubbard, Anthony Patrick O'Brien, 3e.

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Chapter 14: Monopoly and Antitrust Policy

Chapter :08

Theory of Firm: Monopoly

Is Any Firm Ever really a Monopoly?

Define monopoly.

Where Do Monopolies Come From?

Explain the four main reasons monopolies arise.

How Does a Monopoly Choose Price and Output?

Explain how a monopoly chooses price and output.

Does Monopoly Reduce Economic Efficiency?

Use a graph to illustrate how a

monopoly affects economic efficiency.

Government Policy toward Monopoly

Use a graph to illustrate how a

monopoly affects economic efficiency

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ter 14: Monopoly and Antitrust Policy

1. (a) How is a monopolist different from a perfect competitor?

(b) Show that the rate of decline of MR is twice the rate of decline of price in

monopoly.

(c) How does a monopolist choose its price and quantity? Do you agree that there is no supply curve for a

monopolist?

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Monopoly A firm that is the only seller of a good or service that does not have a close substitute.

Is Any Firm Ever Really a Monopoly? Define monopoly.

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1. A government blocks the entry of more than one firm into a market.

2. One firm has control of a key resource necessary to produce a good.

3. There are important network externalities in supplying the good or service.

4. Economies of scale are so large that one firm has a natural monopoly.

Where Do Monopolies Come From?

To have a monopoly, barriers to entering the market must be so high that no other firms can enter.

Barriers to entry may be high enough to keep out competing firms for four main reasons:

Explain the four main reasons

monopolies arise.

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1. By granting a patent or copyright to an

individual or firm, giving it the exclusive right to produce a product.

2. By granting a firm a public franchise, making it the exclusive legal provider of a good or service.

Where Do Monopolies Come From?

Entry Blocked by Government Action

In the United States, governments block entry in two main ways:

Explain the four main reasons

monopolies arise.

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Where Do Monopolies Come From?

Entry Blocked by Government Action

Patents and Copyrights

Patent The exclusive right to a product for a period of 20 years from the date the product is invented.

Copyright A government-granted exclusive right to produce and sell a creation.

Public Franchises

Public franchise A government designation that a firm is the only legal provider of a good or service.

Explain the four main reasons

monopolies arise.

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Where Do Monopolies Come From?

Control of a Key Resource

Another way for a firm to become a

monopoly is by controlling a key resource.

Network Externalities

Network externalities A situation in which the usefulness of a product

increases with the number of consumers who use it.

Explain the four main reasons

monopolies arise.

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Are Diamond Profits Forever?

The De Beers Diamond Monopoly

Making

the

Connection

De Beers promoted the

sentimental value of diamonds as a way to maintain its position in the diamond market.

Explain the four main reasons monopolies arise.

Whether consumers will pay attention to brands on diamonds remains to be seen, although through 2009, the branding strategy had helped De Beers maintain its 40 percent share of the diamond market.

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Where Do Monopolies Come From?

Natural Monopoly

Natural monopoly A situation in which economies of scale are so large that one firm can supply the entire market at a lower average

total cost than can two or more firms.

Explain the four main reasons

monopolies arise.

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FIGURE 14-1

Average Total Cost Curve for a Natural Monopoly

Where Do Monopolies Come From?

Natural Monopoly

Explain the four main reasons monopolies arise.

With a natural monopoly, the average total cost curve is still falling when it crosses the demand curve (point A).

If only one firm is producing electric power in the market, and it

produces where average cost intersects the demand curve, average total cost will equal $0.04 per kilowatt-hour of electricity produced.

If the market is divided between two firms, each producing 15 billion kilowatt-hours, the average cost of producing electricity rises to $0.06 per kilowatt-hour (point B). In this case, if one firm expands

production, it can move down the

average total cost curve, lower its

price, and drive the other firm out of

business.

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Solved Problem 14-2

Is the OpenTable Web Site a Natural Monopoly?

Explain the four main reasons monopolies arise.

YOUR TURN:

For more practice, do related problem 2.11 at the end of this chapter.

OpenTable is a Web site that allows people to make restaurant

reservations online. At this point, there’s no other technology or

easy solution for making Web reservations.

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• The good thing. It sells more units of the product.

• The bad thing. It receives less revenue from each unit than it would have received at the higher price.

How Does a Monopoly Choose Price and Output?

Marginal Revenue Once Again

When a firm cuts the price of a product, one good

thing happens, and one bad thing happens:

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How Does a Monopoly Choose Price and Output?

Marginal Revenue Once Again

FIGURE 14-2

Calculating a Monopoly’s Revenue

Explain how a monopoly chooses price and output.

Time Warner Cable faces a downward-sloping demand curve for subscriptions to basic cable.

To sell more subscriptions, it must cut the price. When this happens, it gains revenue from selling more subscriptions but loses revenue from selling at a lower price the subscriptions that it could have sold at a higher price. The firm’s marginal revenue is the change in revenue from selling another subscription. We can calculate marginal revenue by subtracting the revenue lost as a result of a price cut from the revenue gained.

The table shows that Time

Warner’s marginal revenue is less than the price for every

subscription sold after the first

subscription. Therefore, Time

Warner’s marginal revenue curve

will be below its demand curve.

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How Does a Monopoly Choose Price and Output?

Profit Maximization for a Monopolist

FIGURE 14-3

Profit-Maximizing Price and Output for a Monopoly

Explain how a monopoly chooses price and output.

Panel (a) shows that to maximize profit, Time Warner should sell subscriptions up to the point where the marginal revenue

In panel (b), the green box represents Time

Warner’s profits. Time Warner’s profit equals $12 ×

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Finding the Profit-Maximizing Price and Output for a Monopolist

Solved Problem 14-3

PRICE QUANTITY TOTAL REVENUE

MARGINAL REVENUE

(MR = ΔTR/ΔQ) TOTAL

COST MARGINAL COST (MC = ΔTC/ΔQ)

$17 3 $51 – $56 –

16 4 64 $13 63 $7

15 5 75 11 71 8

14 6 84 9 80 9

13 7 91 7 90 10

12 8 96 5 101 11

Don’t Let This Happen to YOU!

Don’t Assume That Charging a Higher Price Is Always More Profitable for a Monopolist

Explain how a monopoly chooses price and output.

YOUR TURN:

Test your understanding by doing related problems 3.3 , 3.4 and 3.7 at the end of this chapter.

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FIGURE 14-4

What Happens If a Perfectly Competitive Industry Becomes a Monopoly?

Does Monopoly Reduce Economic Efficiency?

Comparing Monopoly and Perfect Competition

Use a graph to illustrate how a monopoly affects economic efficiency.

In panel (b), the perfectly competitive

television industry became a monopoly. As a result, the equilibrium quantity falls, and the In panel (a), the market for television sets is

perfectly competitive, and price and quantity

are determined by the intersection of the

demand and supply curves.

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FIGURE 14-5

The Inefficiency of Monopoly

Does Monopoly Reduce Economic Efficiency?

Measuring the Efficiency Losses from Monopoly

Use a graph to illustrate how a monopoly affects economic efficiency.

A monopoly charges a higher price, P

_M

, and produces a smaller

quantity, Q

_M

, than a perfectly

competitive industry, which charges price P

_C

and produces Q

_C

.

The higher price reduces consumer surplus by the area equal to the rectangle A and the triangle B.

Some of the reduction in consumer

surplus is captured by the monopoly

as producer surplus, and some

becomes deadweight loss, which is

the area equal to triangles B and C.

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1. Monopoly causes a reduction in consumer surplus.

2. Monopoly causes an increase in producer surplus.

3. Monopoly causes a deadweight loss, which represents a reduction in economic efficiency.

Does Monopoly Reduce Economic Efficiency?

Measuring the Efficiency Losses from Monopoly

We can summarize the effects of monopoly as follows:

Use a graph to illustrate how a

monopoly affects economic

efficiency.

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Market power The ability of a firm to charge a price greater than marginal cost.

Market Power and Technological Change

The introduction of new products requires firms to spend funds on research and

development.

Because firms with market power are more likely to earn economic profits than are

perfectly competitive firms, they are also more likely to carry out research and development and introduce new products.

Does Monopoly Reduce Economic Efficiency?

How Large Are the Efficiency Losses Due to Monopoly?

Use a graph to illustrate how a monopoly affects economic efficiency.

14.4 LEARNING

OBJECTIVE

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Government Policy toward Monopoly

Antitrust Laws and Antitrust Enforcement

Collusion An agreement among firms to charge the same price or otherwise not to compete.

Antitrust laws Laws aimed at

eliminating collusion and promoting competition among firms.

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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Government Policy toward Monopoly

LAW DATE PURPOSE

Sherman Act 1890 Prohibited “restraint of trade,” including price fixing and collusion. Also outlawed monopolization.

Clayton Act 1914 Prohibited firms from buying stock in competitors and from having directors serve on the boards of

competing firms.

Federal Trade

Commission Act 1914 Established the Federal Trade Commission (FTC) to help administer antitrust laws.

Robinson-Patman Act 1936 Prohibited charging buyers different prices if the result would reduce competition.

Cellar-Kefauver Act 1950 Toughened restrictions on mergers by prohibiting any mergers that would reduce competition.

Antitrust Laws and Antitrust Enforcement

Table 14-1

Important U.S. Antitrust Laws

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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Horizontal merger A merger

between firms in the same industry.

Vertical merger A merger between firms at different stages of production of a good.

Government Policy toward Monopoly

Mergers: The Trade-off between Market Power and Efficiency

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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FIGURE 14-6

A Merger That Makes Consumers Better Off

Government Policy toward Monopoly

Mergers: The Trade-off between Market Power and Efficiency

Discuss government policies toward monopoly.

14.5 LEARNING OBJECTIVE

This figure shows the result of all the firms in a perfectly

competitive industry merging to form a monopoly.

If the monopoly has lower costs

than the perfectly competitive

firms, as shown by the marginal

cost curve shifting to MC after

the merger, it is possible that the

price will actually decline from P

_C

to P

_Merge

and that output will

increase from Q

_C

to Q

_Merge

following the merger.

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1. Market definition

2. Measure of concentration 3. Merger standards

Market Definition

A market consists of all firms making products that consumers view as close substitutes.

Government Policy toward Monopoly

The Department of Justice and FTC Merger Guidelines

The guidelines have three main parts:

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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• 1 firm, with 100 percent market share (a monopoly):

HHI = 100

²

= 10,000 Measure of Concentration

• 2 firms, each with a 50 percent market share:

HHI = 50

²

+ 50

²

= 5,000

• 4 firms, with market shares of 30 percent, 30 percent, 20 percent, and 20 percent:

HHI = 30

²

+ 30

²

+ 20

²

+ 20

²

= 2,600

• 10 firms, each with market shares of 10 percent:

HHI = 10 x (10

²

) = 1,000

Government Policy toward Monopoly

The Department of Justice and FTC Merger Guidelines

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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• Post-merger HHI below 1,000. These markets are not concentrated, so mergers in them are not challenged.

Merger Standards

• Post-merger HHI between 1,000 and 1,800. These markets are moderately concentrated. Mergers that raise the HHI by less than 100 probably will not be challenged. Mergers that raise the HHI by more than 100 may be challenged.

• Post-merger HHI above 1,800. These markets are highly

concentrated. Mergers that increase the HHI by less than 50 points will not be challenged. Mergers that increase the HHI

by 50 to 100 points may be challenged. Mergers that increase the HHI by more than 100 points will be challenged.

Government Policy toward Monopoly

The Department of Justice and FTC Merger Guidelines

Discuss government policies toward monopoly.

14.5 LEARNING

OBJECTIVE

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Have Google and Microsoft Violated the Antitrust Laws?

Making

the

Connection

Discuss government policies toward monopoly.

14.5 LEARNING OBJECTIVE

Does Google’s monopoly power harm consumers?

The debate over the government’s role in promoting competition seems certain to

continue.

YOUR TURN:

Test your understanding by doing related problems 5.6 and 5.15 at the end of this chapter.

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FIGURE 14-7

Regulating a Natural Monopoly

Government Policy toward Monopoly

Regulating Natural Monopolies

Discuss government policies toward monopoly.

14.5 LEARNING OBJECTIVE

A natural monopoly that is not subject to government regulation will charge a price equal to P

_M

and produce Q

_M

. If government regulators want to achieve economic efficiency, they will set the regulated price equal to P

_E

, and the monopoly will produce Q

_E

.

Unfortunately, P

_E

is below average cost, and the monopoly will suffer a loss, shown by the shaded rectangle.

Because the monopoly will

not continue to produce in

the long run if it suffers a

loss, government regulators

set a price equal to average

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The End of the Cable TV Monopoly?

AN INSIDE LOOK

>>

Competition lowers the price of cable TV and increases economic efficiency.

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The Costs of Monopoly: Deadweight Loss

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CAN ANYTHING GOOD BE SAID ABOUT MONOPOLY?

 Monopoly May Aid Innovation

 Natural Monopoly: Where Single-Firm

Production Is Cheapest

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 Profit fuels the fire of invention

 Modern theories of economic growth

emphasize that monopoly when

it increases innovation-

may increase economic

growth.

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Single-Firm Production Is Cheapest

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The Competition Act, 2012 ( Bangladesh)

• To promote, ensure and sustain congenial atmosphere for the competition in trade, to prevent, control and eradicate collusion, monopoly and oligopoly, combination or abuse of dominant position or activities adverse to the competition;

• The Consumers’ Right Protection Act, 2009