ECON 1116: Chapter 9 monopolies

Monopolies

characteristics of a monopoly

market with only one seller

no close substitutes

imposisble barriers to entry

near complete market power

makes long run economic profit

market power

the ability to set and control price

economies of scale

average total cost decreases when a firm increases production

natural monopolies

when an industry exhibits such large economies of scale that its so efficient and it becomes the only good firm left in that market

how do governments promote certain monopolies

granting patents

awarding copyrights

rent-seeking behavior

using extra revenue to play defense, hiring lawyers —- lawyering up!

price discrimination

charging different types of customers different prices

perfect/ first-degree price discrimination

charging each consumer their maximum willingness to pay

second-degree price discrimination

charging different prices based on how much of the product a person purchases (ie. bundles)

third-degree price discrimination

charging different prices for different groups of people with different elasticities. (ie. buying plane tickets last minute v far in advance)

marginal cost pricing rule

where regulators can maneuver to have natural monopolies price but this will cuase the firm to incur long term losses since their average total cost is greater than their price

average cost pricing rule

forces firm to produce where price equals their average total cost to earn only a normal return on investment but still stay in business in the long run

consumers pay higher prices for less output, DwL

rate of return regulation

allows firm to earn a normal return on capital investing in the firm includes legislation about the acceptable expenditures that can eb counted in cost and capital expenditures

price caps

maximum price that a regulated firm can sell its product. price caps are flexible and can allow for changing cost conditions

antitrust laws

legislation designed to maintain competition and prevent monopolies from even developing in the first place

sherman antitrust act

1890

restraint of trade, felonizes attempts to monopolize

clayton antitrust act

1914

rules price discrimination as unlawful if it significantly reduces competition

companies not allowed to merge with others if it would allow them to control a significant market share/majority market share

federal trade commission act

1914

deceptive means of levying competition made illegal

establish federal trade commission as an independent regulatory agency

concentration ratios

allow economists to quantify the share of industry sales that can be attributed to a specific firm

herfindani-hirschman index (HHI)

primary market power measure that is standardly used by institutions like the DOJ to

determine whether or not they should approve a merger

judge monopoly power

HHI = (S1)² +… (Sn)²

contestable markets

those markets with barriers to entry that are so low that high competition naturally allows prices to stay at a competitive level