Monopoly and Antitrust Policy

These flashcards cover key concepts from the lecture on monopolies and antitrust policy, providing definitions and explanations crucial for understanding the topic.

What is a monopoly?

A market structure where a firm is the only seller of a good or service that has no close substitutes.

What are the two reasons we study monopolies?

1. To understand how true monopolists behave and 2. To identify firms that may collude to act like a monopolist.

What is one way a pizzeria might not be a true monopoly?

It faces competition from other fast food restaurants and grocery stores selling pizzas.

What are the four main barriers to entry that allow monopolies to arise?

1. Government restrictions on entry 2. Control of a critical resource 3. Network externalities 4. Natural monopoly.

How do patents and copyrights restrict entry into a market?

They grant exclusive rights to produce certain products, encouraging innovation by protecting profits against competition.

What is a public franchise?

A government designation that allows a firm to be the only legal provider of a good or service.

What is an example of a company that had control over a key resource?

The Aluminum Company of America (Alcoa) controlled nearly all the bauxite supply.

What are network externalities?

A characteristic of a product where its usefulness increases with the number of users.

Define a natural monopoly.

A situation where economies of scale are so large that one firm can supply the entire market at a lower cost than multiple firms.

How do monopolists maximize profit?

By producing the quantity where marginal revenue equals marginal cost (MR=MC).

What happens to consumer and producer surplus in the presence of a monopoly?

Consumer surplus decreases due to higher prices while producer surplus increases, potentially leading to a deadweight loss.

What is the purpose of antitrust laws?

To eliminate collusion and promote competition among firms.

What did the Sherman Act prohibit?

It prohibited 'restraint of trade' including price fixing and collusion.

What does the Clayton Act prohibit?

It prohibits firms from buying stock in competitors and from having overlapping directors.

What are horizontal mergers?

Mergers between firms in the same industry that may enhance market power.

Why might public ownership of a monopoly be beneficial?

It can focus on public service rather than profit maximization.

What is a compromise typically made for pricing in a regulated natural monopoly?

Allowing the firm to charge a price where it makes zero economic profit.