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Objectives
Define monopoly. Explain the four main reasons monopolies arise. Explain how a monopoly chooses price and output. Use a graph to illustrate how a monopoly affects economic efficiency. Discuss government policies toward monopoly.
ProductDifferentiation
Homogeneousgood Oneseller
Monopoly
NumberofSellers
Oligopoly
MonopolisticCompetition CompetitiveMarket
ManySellers
FirmsinPerfectlyCompetitiveMarkets
TheFourMarketStructures
MARKET STRUCTURE
CHARACTERISTIC PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY
IsAnyFirmEverReallyaMonopoly?
Monopoly
Afirmthatistheonlysellerofagoodorservice thatdoesnothaveaclosesubstitute. Afirmisamonopolyifitcansetitsownprice. IsXbox360a CloseSubstitute forPlayStation3?
Tomanygamers,PlayStation3isaclosesubstituteforXbox.
WhereDoMonopoliesComeFrom?
Tohaveamonopoly,barrierstoenteringthemarketmustbeso highthatnootherfirmscanenter. Barrierstoentrymaybehighenoughtokeepoutcompeting firmsforfourmainreasons: 1. Governmentblockstheentry ofmorethanonefirmintoa market. 2. Onefirmhascontrolofakeyresourcenecessarytoproducea good. 3. Thereareimportantnetworkexternalities insupplyingthe goodorservice. 4. Economiesofscalearesolargethatonefirmhasanatural monopoly.
WhereDoMonopoliesComeFrom?
EntryBlockedbyGovernmentAction IntheUnitedStates,governmentblocksentryin twomainways: 1. Bygrantingapatent orcopyright toan individualorfirm,givingittheexclusiverightto produceaproduct. 2. Bygrantingafirmapublicfranchise,makingit theexclusivelegalproviderofagoodorservice.
WhereDoMonopoliesComeFrom?
EntryBlockedbyGovernmentAction: PatentsandCopyrights Patent Theexclusiverighttoaproductforaperiodof20yearsfromthe datetheproductisinvented. Copyright Agovernmentgrantedexclusiverighttoproduceandsella creation. PublicFranchises Adesignationbythegovernmentthatafirmistheonlylegal providerofagoodorservice.
WhereDoMonopoliesComeFrom?
ControlofaKeyResource Anotherwayforafirmtobecomeamonopoly isbycontrollingakeyresource.Anexampleis bauxitetoproducealuminium ore. In2007,Australiawasoneofthetop producersofbauxitewithalmostonethird worldshare,followedbyChina,Brazil,Guinea, andJamaica.
WhereDoMonopoliesComeFrom?
Networkexternalities Thesituationwheretheusefulnessofaproduct increaseswiththenumberofconsumerswhouse it. Naturalmonopoly Asituationinwhicheconomiesofscaleareso largethatonefirmcansupplytheentiremarket ataloweraveragetotalcostthancantwoor morefirms.
WhereDoMonopoliesComeFrom?
NaturalMonopoly
AverageTotalCostCurve foraNaturalMonopoly
HowDoesaMonopolyChoosePriceandOutput?
MarginalRevenueOnceAgain Monopoliesarepricemakers.Whenafirmcutsthe priceofaproduct,onegoodthinghappens,andone badthinghappens: Thegoodthing. Itsellsmoreunitsoftheproduct. Thebadthing. Itreceiveslessrevenuefromeachunitthanitwould havereceivedatthehigherprice.
HowDoesaMonopolyChoosePriceandOutput?
MarginalRevenueOnceAgain
CalculatingaMonopolys Revenue
HowDoesaMonopolyChoosePriceandOutput?
ProfitMaximizationforaMonopolist
ProfitMaximizingPriceandOutputforaMonopoly
FindingtheProfitMaximizingPriceandOutputforaMonopolist
PRICE $17 16 15 14 13 12
QUANTITY 3 4 5 6 7 8
DontLetThisHappentoYOU!
DontAssumeThatChargingaHigherPriceIs AlwaysMoreProfitableforaMonopolist
DoesMonopolyReduceEconomicEfficiency?
ComparingMonopolyandPerfectCompetition
WhatHappensIfaPerfectlyCompetitive IndustryBecomesaMonopoly?
DoesMonopolyReduceEconomicEfficiency?
MeasuringtheEfficiencyLossesfromMonopoly
TheInefficiencyofMonopoly
DoesMonopolyReduceEconomicEfficiency?
MeasuringtheEfficiencyLossesfromMonopoly
Learning Objective14.4
DoesMonopolyReduceEconomicEfficiency?
HowLargeAretheEfficiencyLossesDuetoMonopoly?
Remember,Marketpower Istheabilityofafirm tochargeapricegreaterthanmarginalcost.
MarketPowerandTechnologicalChange
Theintroductionofnewproductsrequiresfirmsto spendfundsonresearchanddevelopment. Becausefirmswithmarketpoweraremorelikely toearneconomicprofitsthanareperfectly competitivefirms,theyarealsomorelikelytocarry outresearchanddevelopmentandintroducenew products.
GovernmentPolicytowardMonopoly
Collusion Anagreementamongfirmstochargethe samepriceorotherwisenottocompete.
AntitrustLawsandAntitrustEnforcement
Antitrustlaws Lawsaimedateliminatingcollusionand promotingcompetitionamongfirms.
GovernmentPolicytowardMonopoly
AntitrustLawsandAntitrustEnforcement
ImportantU.S.AntitrustLaws LAW Sherman Act Clayton Act DATE 1890 1914 PURPOSE Prohibited restraint of trade, including price fixing and collusion. Also outlawed monopolization. Prohibited firms from buying stock in competitors and from having directors serve on the boards of competing firms. Established the Federal Trade Commission (FTC) to help administer antitrust laws. Prohibited charging buyers different prices if the result would reduce competition. Toughened restrictions on mergers by prohibiting any mergers that would reduce competition.
GovernmentPolicytowardMonopoly
Mergers:TheTradeoffbetweenMarketPowerandEfficiency
KeyConcepts
Antitrustlaws Collusion Copyright Horizontalmerger Marketpower Monopoly Naturalmonopoly Networkexternalities Patent Publicfranchise Verticalmerger