Download Monopoly and Antitrust Policy

Monopoly
and Antitrust Policy
Chapter 13
1
IMPERFECT COMPETITION
AND MARKET POWER

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 competitive markets.
 Firms can differentiate their products, advertise, improve quality,
market aggressively, cut prices, and so forth.
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IMPERFECT COMPETITION
AND MARKET POWER
DEFINING INDUSTRY BOUNDARIES
 The ease with which consumers can substitute for a
product limits the extent to which a monopolist can
exercise market power.

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The more broadly a market is defined, the more difficult it
becomes to find substitutes.
pure monopoly An industry with a single firm that
produces a product for which there are no close
substitutes and in which significant barriers to entry
prevent other firms from entering the industry to
compete for profits.
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IMPERFECT COMPETITION
AND MARKET POWER
BARRIERS TO ENTRY
 barrier to entry Something that prevents new firms
from entering and competing in imperfectly
competitive industries.

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Government franchise A monopoly by virtue of
government directive.
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
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IMPERFECT COMPETITION
AND MARKET POWER
PRICE: THE FOURTH DECISION VARIABLE
Regardless of the source of market power, output price
is not taken as given by the firm. Instead:
 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,
(3) how much to demand in each input market
(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
(2) that firms act to maximize profits.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
DEMAND IN MONOPOLY MARKETS
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
With one firm in a monopoly market, there is no distinction between the firm and the industry.
In a monopoly, the firm is the industry. The market demand curve is the demand curve facing
the firm, and the total quantity supplied in the market is what the firm decides to produce.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS

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By knowing the demand curve it faces, the
firm must simultaneously choose both the
quantity of output to supply and the price of
that output.
Once the firm chooses a price, the market
determines how much will be sold.
The monopoly chooses the point on the
market demand curve where it wants to be.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Marginal Revenue and Market Demand
Marginal Revenue Facing a Monopolist
(1)
QUANTITY
0
1
2
3
4
5
6
7
8
9
10
(2)
PRICE
(3)
TOTAL REVENUE
$11
10
9
8
7
6
5
4
3
2
1
0
$10
18
24
28
30
30
28
24
18
10
(4)
MARGINAL REVENUE

$10
8
6
4
2
0
2
4
6
8
For a monopolist, an increase in output involves not just producing more and selling it, but
also reducing the price of its output to sell it.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Marginal Revenue Curve Facing a Monopolist
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS

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A profit-maximizing monopolist will continue to
produce output as long as MR exceeds MC.
Because the market demand curve is the demand
curve for a monopoly, a monopolistic firm faces a
downward-sloping demand curve.
The monopolist must lower the price it charges to
raise output and sell it.
Selling the additional output will raise revenue, but
this increase is offset somewhat by the lower price
charged for all unit sold.
Therefore, the increase in revenue from increasing
output by one (MR) is less than the price.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
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
segment of the demand curve that lies
directly above it.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS

At zero units →TR=0
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Output between 0 and Q* → firm moves down on its
demand curve from A to B: MR>0, TR continues to
increase
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To begin selling, the firm must lower the product price (MR>0, TR
begins to increase)
To sell more, the firm must lower its price more and more
Q rising pushing TR (PxQ) up and P falling pushing TR down
Up to point B → the effect of increasing Q dominates the
effect of falling P: TR rises, MR>0
Point B toward C → lowering P to sell more Q, but above
Q* : MR<0, TR starts to fall
Beyond Q* → the effect of cutting P on TR is larger than
the effect of increasing Q: TR falls
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At C → TR=0 because P=0
PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
The Monopolist’s Profit-Maximizing Price and
Output
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Price and Output Choice for a Profit-Maximizing Monopolist
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.
 A monopolist sets both price and quantity, and the
amount of output that it supplies depends on both its
marginal cost curve and the demand curve that it faces. 15

PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Monopoly in the Long and Short Run
Price and Output Choice for a Monopolist
Suffering Losses in the Short Run
If a firm can reduce its losses by operating in the short run, it will do so.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS

Perfectly competitive markets: Long run and short
run
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Short run → fixed factor of production, no entry and exit
(MC increase with Q)
Long run → free entry and exit, LR equilibrium where
industry profits equal to zero
Monopoly:

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Short run → limited with fixed factor of production
(diminishing returns to factors of production)
Long run → if monopoly earning positive profits, nothing
will happen (entry blocked)
Monopoly will operate at the most efficient scale of
production (no change in LR)
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
PERFECT COMPETITION AND MONOPOLY
COMPARED
A Perfectly Competitive Industry in Long-run Equilibrium
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Comparison of Monopoly and Perfectly Competitive Outcomes for a
Firm with Constant Returns to Scale
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
 collusion The act of working with other
producers in an effort to limit competition and
increase joint profits.

The outcome would be exactly the same as
the outcome of a monopoly in the industry.
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THE SOCIAL COSTS OF
MONOPOLY
INEFFICIENCY AND CONSUMER LOSS
Welfare Loss from Monopoly
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Monopoly leads to an inefficient mix of output.
PRICE DISCRIMINATION

price discrimination Charging different
prices to different buyers.

perfect price discrimination Occurs when
a firm charges the maximum amount that
buyers are willing to pay for each unit.
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EXAMPLES OF PRICE
DISCRIMINATION
Price Discrimination
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