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Chapter 14: Monopoly and Antitrust Policy
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Chapter 14: Monopoly and Antitrust Policy
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CHAPTER
14
Chapter 14: Monopoly and Antitrust Policy
Monopoly
and
Antitrust Policy
Until 2008, Time
Warner Cable was
the only provider of
cable TV in
Manhattan;
Time Warner had a
monopoly.
Prepared by:
Fernando Quijano
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CHAPTER
14
Chapter Outline and
Learning Objectives
Chapter 14: Monopoly and Antitrust Policy
Monopoly
and
Antitrust Policy
14.1 Is Any Firm Ever really a Monopoly?
Define monopoly.
14.2 Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
14.3 How Does a Monopoly Choose Price
and Output?
Explain how a monopoly chooses
price and output.
14.4 Does Monopoly Reduce Economic
Efficiency?
Use a graph to illustrate how a
monopoly affects economic efficiency.
14.5 Government Policy toward
Monopoly
Discuss government policies toward
monopoly.
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14.1 LEARNING OBJECTIVE
Is Any Firm Ever Really a Monopoly?
Define monopoly.
Chapter 14: Monopoly and Antitrust Policy
Monopoly A firm that is
the only seller of a good
or service that does not
have a close substitute.
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Making Is the Xbox 360 a Close
the
Chapter 14: Monopoly and Antitrust Policy
Connection
14.1 LEARNING OBJECTIVE
Define monopoly.
Substitute for the PlayStation 3?
With consumers apparently
viewing the two systems primarily
as game consoles, the Xbox had
a significant advantage because
it was priced $100 less than the
PS3.
To many gamers, Microsoft’s
Xbox is a better deal than
PlayStation 3.
YOUR TURN: Test your understanding by doing related problem 1.7 at the end of
this chapter.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
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:
Chapter 14: Monopoly and Antitrust Policy
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.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
Entry Blocked by Government Action
In the United States, governments block entry in two
main ways:
Chapter 14: Monopoly and Antitrust Policy
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.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
Entry Blocked by Government Action
Patents and Copyrights
Chapter 14: Monopoly and Antitrust Policy
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.
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Making The End of the Christmas
the
Chapter 14: Monopoly and Antitrust Policy
Connection
14.2 LEARNING OBJECTIVE
Explain the four main reasons
monopolies arise.
Plant Monopoly
After a university researcher
discovered the technique for
growing poinsettias, new firms
quickly entered the industry,
and the price of poinsettias
plummeted. Soon consumers
could purchase them for as little
as three for $10. At those
prices, the Ecke family’s firm
was unable to earn economic
profits.
At one time, the Ecke family had a
monopoly on growing poinsettias, but
many new firms entered the industry.
YOUR TURN: Test your understanding by doing related problem 2.9 at the end of
this chapter.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
Control of a Key Resource
Chapter 14: Monopoly and Antitrust Policy
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.
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14.2 LEARNING OBJECTIVE
Making Are Diamond Profits Forever?
the
Chapter 14: Monopoly and Antitrust Policy
Connection
Explain the four main reasons
monopolies arise.
The De Beers Diamond Monopoly
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.
De Beers promoted the
sentimental value of diamonds
as a way to maintain its position
in the diamond market.
YOUR TURN: Test your understanding by doing related problem 2.10 at the end
of this chapter.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
Natural Monopoly
Chapter 14: Monopoly and Antitrust Policy
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.
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14.2 LEARNING OBJECTIVE
Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
Natural Monopoly
FIGURE 14-1
Chapter 14: Monopoly and Antitrust Policy
Average Total Cost Curve
for a Natural Monopoly
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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14.2 LEARNING OBJECTIVE
Solved Problem
14-2
Explain the four main reasons
monopolies arise.
Chapter 14: Monopoly and Antitrust Policy
Is the OpenTable Web Site a Natural Monopoly?
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.
YOUR TURN: For more practice, do related problem 2.11 at the end of this
chapter.
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How Does a Monopoly Choose
Price and Output?
14.3 LEARNING OBJECTIVE
Explain how a monopoly chooses
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:
Chapter 14: Monopoly and Antitrust Policy
• 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.
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How Does a Monopoly Choose
Price and Output?
14.3 LEARNING OBJECTIVE
Explain how a monopoly chooses
price and output.
Marginal Revenue Once Again
FIGURE 14-2
Chapter 14: Monopoly and Antitrust Policy
Calculating a Monopoly’s
Revenue
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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14.3 LEARNING OBJECTIVE
How Does a Monopoly Choose
Price and Output?
Explain how a monopoly chooses
price and output.
Profit Maximization for a Monopolist
FIGURE 14-3
Chapter 14: Monopoly and Antitrust Policy
Profit-Maximizing Price and Output for a Monopoly
Panel (a) shows that to maximize profit, Time Warner should sell
subscriptions up to the point where the marginal revenue from
selling the last subscription equals its marginal cost (point A).
In panel (b), the green box represents Time
Warner’s profits. Time Warner’s profit equals $12 ×
6 = $72.
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14.3 LEARNING OBJECTIVE
Solved Problem
Explain how a monopoly chooses
price and output.
14-3
Chapter 14: Monopoly and Antitrust Policy
Finding the Profit-Maximizing Price and Output for a Monopolist
TOTAL
REVENUE
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
TOTAL
COST
MARGINAL COST
(MC = ΔTC/ΔQ)
PRICE
QUANTITY
$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
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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Does Monopoly Reduce
Economic Efficiency?
14.4 LEARNING OBJECTIVE
Use a graph to illustrate how a
monopoly affects economic
efficiency.
Comparing Monopoly and Perfect Competition
FIGURE 14-4
Chapter 14: Monopoly and Antitrust Policy
What Happens If a Perfectly Competitive
Industry Becomes a Monopoly?
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.
In panel (b), the perfectly competitive
television industry became a monopoly. As a
result, the equilibrium quantity falls, and the
equilibrium price rises.
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Does Monopoly Reduce
Economic Efficiency?
14.4 LEARNING OBJECTIVE
Use a graph to illustrate how a
monopoly affects economic
efficiency.
Measuring the Efficiency Losses from Monopoly
FIGURE 14-5
Chapter 14: Monopoly and Antitrust Policy
The Inefficiency of Monopoly
A monopoly charges a higher price,
PM, and produces a smaller quantity,
QM, than a perfectly competitive
industry, which charges price PC and
produces QC.
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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Does Monopoly Reduce
Economic Efficiency?
14.4 LEARNING OBJECTIVE
Use a graph to illustrate how a
monopoly affects economic
efficiency.
Measuring the Efficiency Losses from Monopoly
We can summarize the effects of monopoly as follows:
Chapter 14: Monopoly and Antitrust Policy
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.
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Does Monopoly Reduce
Economic Efficiency?
14.4 LEARNING OBJECTIVE
Use a graph to illustrate how a
monopoly affects economic
efficiency.
How Large Are the Efficiency Losses Due to Monopoly?
Market power The ability of a firm to charge
a price greater than marginal cost.
Chapter 14: Monopoly and Antitrust Policy
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.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
Collusion An agreement among firms
to charge the same price or otherwise
not to compete.
Chapter 14: Monopoly and Antitrust Policy
Antitrust Laws and Antitrust Enforcement
Antitrust laws Laws aimed at
eliminating collusion and promoting
competition among firms.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
Antitrust Laws and Antitrust Enforcement
Table 14-1
Chapter 14: Monopoly and Antitrust Policy
Important U.S. Antitrust Laws
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.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
Mergers: The Trade-off between Market Power and Efficiency
Chapter 14: Monopoly and Antitrust Policy
Horizontal merger A merger
between firms in the same industry.
Vertical merger A merger between
firms at different stages of production
of a good.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
Mergers: The Trade-off between Market Power and Efficiency
FIGURE 14-6
Chapter 14: Monopoly and Antitrust Policy
A Merger That Makes
Consumers Better Off
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 PC
to PMerge and that output will
increase from QC to QMerge
following the merger.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
The Department of Justice
and FTC Merger Guidelines
The guidelines have three main parts:
1. Market definition
Chapter 14: Monopoly and Antitrust Policy
2. Measure of concentration
3. Merger standards
Market Definition
A market consists of all firms making
products that consumers view as
close substitutes.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
The Department of Justice
and FTC Merger Guidelines
Measure of Concentration
Chapter 14: Monopoly and Antitrust Policy
• 1 firm, with 100 percent market share (a monopoly):
HHI = 1002 = 10,000
• 2 firms, each with a 50 percent market share:
HHI = 502 + 502 = 5,000
• 4 firms, with market shares of 30 percent, 30 percent, 20
percent, and 20 percent:
HHI = 302 + 302 + 202 + 202 = 2,600
• 10 firms, each with market shares of 10 percent:
HHI = 10 x (102) = 1,000
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
The Department of Justice
and FTC Merger Guidelines
Merger Standards
• Post-merger HHI below 1,000. These markets are not
concentrated, so mergers in them are not challenged.
Chapter 14: Monopoly and Antitrust Policy
• 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.
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Making
the
Connection
14.5 LEARNING OBJECTIVE
Have Google and Microsoft
Violated the Antitrust Laws?
Discuss government policies
toward monopoly.
Chapter 14: Monopoly and Antitrust Policy
The debate over the
government’s role in
promoting competition
seems certain to
continue.
Does Google’s monopoly power harm consumers?
YOUR TURN: Test your understanding by doing related problems 5.6 and 5.15 at
the end of this chapter.
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14.5 LEARNING OBJECTIVE
Government Policy toward Monopoly
Discuss government policies
toward monopoly.
Regulating Natural Monopolies
FIGURE 14-7
Chapter 14: Monopoly and Antitrust Policy
Regulating a Natural
Monopoly
A natural monopoly that is
not subject to government
regulation will charge a price
equal to PM and produce QM.
If government regulators
want to achieve economic
efficiency, they will set the
regulated price equal to PE,
and the monopoly will
produce QE.
Unfortunately, PE 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
cost, which is PR in the
figure.
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AN INSIDE
LOOK
Chapter 14: Monopoly and Antitrust Policy
>> The End of the Cable TV Monopoly?
Competition lowers the price of cable TV and increases economic efficiency.
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Chapter 14: Monopoly and Antitrust Policy
KEY TERMS
Antitrust laws
Natural monopoly
Collusion
Network externalities
Copyright
Patent
Horizontal merger
Public franchise
Market power
Vertical merger
Monopoly
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