Module 10: Monopoly

Monopoly Characteristics

• Single seller

• No close substitutes

• Barriers to entry

  • if a firm is earning a profit, new firms will not be able to enter to compete for them

Government Action Blocks Entry

• Patent

• Copyright

• Trademark

Natural Monopoly

Economies of scale are large, one firm can supply the entire market at a lower ATC than having competing firms. It is impossible to get into the industry due to the costs electricity.

Monopoly Graph

• Demand curve is downward sloping

• Their price and marginal revenue will not be the same

Profit Maximization Monopoly

• Profit-maximizing: P > MR = MC

• Profit-maximizing quantity: output where MR = MC

Market power Slope

market power exists any time we see a downward sloping demand

Price discrimination

• charging different prices to different customers for the same product

• the price differences cannot be due to differences in cost of producing

Perfect price discrimination

• is charging every customer exactly what they are willing to pay

• is not really possible in real life, but it would eliminate deadweight losses

• would allow the monopoly to reach the efficient outcome

Antitrust laws

laws designed to prevent and break up monopolies

• used to prevent mergers and acquisitions that would create large firms

• used to stop collusion

• used to promote competition

Sherman Act (1890)

• prohibited "restraint of trade", price fixing, collusion

• outlawed monopolization

Clayton Act (1914)

• prohibited firms from buying stock in competitors

• prohibited firms from serving on boards of competing firms

 Federal Trade Commission Act (1914)

• established the Federal Trade Commission (FTC)

• FTC enforces antitrust laws

Robinson- Patman Act (1936)

• prohibited firms from price discrimination

• only prohibited if it reduces competition

 Cellar-Kefauver Act (1950)

• toughened restrictions on mergers

• prohibits mergers that reduce competition

Public Franchises

• Government designates legal provider of a good or service

  • electricity or water

• Government operated public enterprise

  • US Postal Service

Horizontal merger

• between firms in the same industry

• more likely to create higher levels of market power

 Vertical merger

• between firms at different stages of production

Regulation of Natural Monopolies

• zero profit pricing: forces the monopoly to charge the break even price and is less efficient

• maximize total surplus: forces the monopoly to charge the price at the efficient outcome (market equilibrium), they will face a loss here