Slide MGT101 Slide13

Prepared by:

Fernando & Yvonn

Quijano

13

Chapter

Monopoly

and Antitrust Policy

CH

and Antitrust Policy

PART III MARKET IMPERFECTIONS AND THE ROLE OF GOVERNMENT

Imperfect Competition and Market Power: Core Concepts

Defining Industry Boundaries Barriers to Entry

Price: The Fourth Decision Variable

Price and Output Decisions in Pure Monopoly Markets

Demand in Monopoly Markets

Perfect Competition and Monopoly Compared Collusion and Monopoly Compared

The Social Costs of Monopoly

Inefficiency and Consumer Loss Rent-Seeking Behavior

Price Discrimination

Examples of Price Discrimination

Remedies for Monopoly: Antitrust Policy

The Development of Antitrust Law: Historical Background Landmark Antitrust Legislation

The Enforcement of Antitrust Law

Initiating Antitrust Actions Sanctions and Remedies Criminal Actions

A Natural Monopoly

Do Natural Monopolies Still Exist?

Imperfect Markets: A Review and a Look Ahead

CH

IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

imperfectly competitive industry

An

industry in which single firms have some

control over the price of their output.

market power

An imperfectly competitive

firm’s ability to raise price without losing all

of the quantity demanded for its product.

Imperfect competition does not mean that

no

competition exists in the market. In some

imperfectly competitive markets competition occurs in

more

arenas than in perfectly

CH

IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

The ease with which consumers can substitute for a product limits the extent to which a

monopolist can exercise market power. The more broadly a market is defined, the more

difficult it becomes to find substitutes.

DEFINING INDUSTRY BOUNDARIES

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IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

pure monopoly

An industry with a single

firm that produces a product for which there

are no close substitutes and in which

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IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

barrier to entry

Something that prevents

new firms from entering and competing in

imperfectly competitive industries.

BARRIERS TO ENTRY

Government Franchises

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IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

Patents

patent

A barrier to entry that grants

exclusive use of the patented product or

process to the inventor.

Economies of Scale and Other Cost Advantages

Ownership of a Scarce Factor of Production

CH

IMPERFECT COMPETITION AND MARKET

POWER: CORE CONCEPTS

PRICE: THE FOURTH DECISION VARIABLE

Price is a decision variable for imperfectly competitive firms. Firms with market

power must decide not only (1) how much to produce, (2) how to produce it, and

(3) how much to demand in each input market (see Figure 7.3), but also (4)

what

price to charge for their output.

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

To analyze monopoly behavior, we make

two assumptions:

(1) that entry to the market is blocked, and

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

DEMAND IN MONOPOLY MARKETS

FIGURE 13.2

The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic; in

a Monopoly, the Market Demand Curve Is the Demand Curve Facing the Firm

CH

PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

Marginal Revenue and Market Demand

TABLE 13.1

Marginal Revenue Facing a Monopolist

(1)

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

FIGURE 13.4

Marginal Revenue

and Total Revenue

A monopoly’s marginal revenue curve

shows the change in total revenue that

results as a firm moves along the

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

FIGURE 13.5

Price and Output Choice for a Profit-Maximizing Monopolist

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

All firms, including monopolies, raise output as long as marginal revenue is greater than

marginal cost. Any positive difference between marginal revenue and marginal cost can be

thought of as marginal profit.

The profit-maximizing level of output for a monopolist is the one at which marginal revenue

equals marginal cost:

MR = MC

.

The Absence of a Supply Curve in Monopoly

A monopoly firm has no supply curve that is independent of the demand curve for its

product.

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

Monopoly in the Long and Short Run

FIGURE 13.6

Price and Output Choice for a Monopolist

Suffering Losses in the Short Run

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

PERFECT COMPETITION AND MONOPOLY

COMPARED

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

Relative to a perfectly competitive industry, a monopolist restricts output, charges higher

prices, and earns positive profits.

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PRICE AND OUTPUT DECISIONS IN PURE

MONOPOLY MARKETS

COLLUSION AND MONOPOLY COMPARED

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y

THE SOCIAL COSTS OF MONOPOLY

INEFFICIENCY AND CONSUMER LOSS

FIGURE 13.9

Welfare Loss from Monopoly

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y

THE SOCIAL COSTS OF MONOPOLY

RENT-SEEKING BEHAVIOR

rent-seeking behavior

Actions taken by

households or firms to preserve positive profits.

government failure

Occurs when the

government becomes the tool of the rent

seeker and the allocation of resources is made

even less efficient by the intervention of

government.

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y

PRICE DISCRIMINATION

price discrimination

Charging different

prices to different buyers.

perfect price discrimination

Occurs

when a firm charges the maximum

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y

PRICE DISCRIMINATION

FIGURE 13.10

Price Discrimination

EXAMPLES OF PRICE DISCRIMINATION

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REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

Historically, governments in market economies

have assumed two basic and seemingly

contradictory roles with respect to imperfectly

competitive industries:

(1)

They

promote

competition and restrict market

power, primarily through antitrust laws, and

CH

REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

THE DEVELOPMENT OF ANTITRUST LAW:

HISTORICAL BACKGROUND

trust

An arrangement in which

shareholders of independent

firms agree to give up their

stock in exchange for trust

certificates that entitle them to

a share of the trust’s common

CH

REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

LANDMARK ANTITRUST LEGISLATION

Interstate Commerce Commission (ICC)

A

federal regulatory group created by Congress

in 1887 to oversee and correct abuses in the

railroad industry.

Sherman Act

Passed by Congress in 1890,

the act declared every contract or conspiracy

to restrain trade among states or nations

illegal and declared any attempt at monopoly,

successful or not, a misdemeanor.

CH

REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

The Sherman Act of 1890

rule of reason

The criterion introduced by

the Supreme Court in 1911 to determine

whether a particular action was illegal

(“unreasonable”) or legal (“reasonable”) within

the terms of the Sherman Act.

CH

REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

The Clayton Act and the Federal Trade

Commission, 1914

Clayton Act

Passed by Congress in 1914 to

strengthen the Sherman Act and clarify the rule of

reason, the act outlawed specific monopolistic

behaviors such as tying contracts, price

discrimination, and unlimited mergers.

Federal Trade Commission (FTC)

A federal

regulatory group created by Congress in 1914 to

investigate the structure and behavior of firms

engaging in interstate commerce, to determine

what constitutes unlawful “unfair” behavior, and to

CH

REMEDIES FOR MONOPOLY:

ANTITRUST POLICY

The Alcoa Case, 1945

per se rule

A rule enunciated by the courts

declaring a particular action or outcome to

CH

y

THE ENFORCEMENT OF ANTITRUST LAW

Government Actions: The Antitrust Division

and the FTC

Wheeler-Lea Act (1938)

Extended the language

of the Federal Trade Commission Act to include

“deceptive” as well as “unfair” methods of

competition.

INITIATING ANTITRUST ACTIONS

Antitrust Division (of the Department of

Justice)

One of two federal agencies empowered

to act against violators of antitrust laws. It

CH

y

THE ENFORCEMENT OF ANTITRUST LAW

SANCTIONS AND REMEDIES

The courts are empowered to impose a number of

remedies if they find that antitrust law has been

violated. Specifically, the courts can

“(1) forbid the continuation of illegal acts,

(2) force the defendants to dispose of the fruits of

their wrong, and

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y

THE ENFORCEMENT OF ANTITRUST LAW

Consent Decrees

consent decrees

Formal agreements on

remedies among all the parties to an antitrust

case that must be approved by the courts.

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y

THE ENFORCEMENT OF ANTITRUST LAW

Criminal Actions

Treble Damages

The practice of the Antitrust Division has been to limit

criminal proceedings to outrageous violations, where

intent to violate is clear.

Any person or private company that sustains injury or

financial loss because of an antitrust violation can

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y

A NATURAL MONOPOLY

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y

A NATURAL MONOPOLY

FIGURE 13.11

A Natural Monopoly

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y

A NATURAL MONOPOLY

DO NATURAL MONOPOLIES STILL EXIST?

The classic examples of natural monopolies over

the years have been public utilities.

Until very recently, state governments have allowed

public utility companies to exist as monopolies

CH

IMPERFECT MARKETS: A REVIEW

AND A LOOK AHEAD

A firm has market power when it exercises some

control over the price of its output or the prices of

the inputs that it uses. The extreme case of a firm

with market power is the pure monopolist. In a pure

monopoly, a single firm produces a product for

which there are no close substitutes in an industry

in which all new competitors are barred from

CH

Antitrust Division (of the

Department of Justice)

barrier to entry

Clayton Act

collusion

consent decree

Federal Trade Commission (FTC)

government failure

government franchise

imperfectly competitive industry

Interstate Commerce Commission

(ICC)

market power

REVIEW TERMS AND CONCEPTS

natural monopoly

patent

perfect price discrimination

per se rule

price discrimination

public choice theory

pure monopoly

rent-seeking behavior

rule of reason

Sherman Act

trust