Monopolies

monopoly

market structure consisting of a firm that is the only seller of a good or service that doesn’t have a close substitute

characteristics of a monopoly

• single seller

• unique product

• impossible entry

• complete market power

• exclusive right over a key resource

public franchiser

exclusive legal provider of a good or service

government designation of monopolies

patents, copyright, trademarks

patent

20 year exclusive right period

copyright

protects books, films, music, and creative arts for creator’s life plus 70 years after death

trademarks

protect names

network externalities

a situation in which the usefulness of a product increases with the number of consumers who use it

natural monopoly

situation in which economies of scale are so large that one firm can supply the entire market at a lower ATC than two or more firms

market inefficiencies with monopoly behavior

producer surplus > consumer surplus leading to higher prices and reduced output (DWL)

market power

ability of a firm to charge a price greater than marginal cost

collusion

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

Sherman Act (1890)

prohibits “restraint of trade” including rice fixing and collusion

Clayton Act (1914)

prohibits mergers or price discrimination if it lessens competition

Robinson-Patman Act (1936)

strengthens price discrimination provisions; prohibits firms from buying stock in competitors and from having directors serve on boards of competing firms

Cellar-Kefauver Act (1950)

toughened restrictions on mergers that reduced compeition

Federal Trade Commission (1914)

unfair methods of competition and deceptive acts are made illegal; established FTC to administer antitrust laws

Department of Justice Antitrust Division (1956)

led by Economist Dr. Donald Turner who impacted antitrust law

economic analysis

• market definition

• Measures of concentration (Herfindahl-Hirschman Index)

• merger standards

horizontal mergers

between firms in the same industry

vertical mergers

between two firms at different stages of the production process

market definition

government tries to determine which goods are close substitutes for those produced by the firms

“appropriate market”

smallest market containing the firms’ products for which an overall price rise within the market would result in total market profits increasing

Herfindahl-Hirschman Index

sum of percentages ²

HHI < 1,500

strongly competitive market

HHI between 1,500 -2,500

somewhat competitive market

HHI > 2,500

oligopoly

HHI = 10,000

monopoly (100²)

how can mergers make consumers better off?

can lead to lower costs, can produce more efficiently

how can mergers make consumers worse off?

costs may not decrease as much as firm claim

regulatory commissions

set prices for natural monopolies to ensure fair access and prevent abuse of market power.

Monopolist ideal price/quantity

MR = MC

efficient price/quantity

MC = D

regulated price/quantity

P_R = ATC