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					Ch 9 - Monopoly

          Market Power

         Market power - the ability to alter the
          market price of a good or service.

             Firms with market power confront
              downward-sloping demand curves.
             Competitive firms face a horizontal
              demand curve.
                      Firm vs. Industry Demand

                            The competitive firm                      The industry
Price (per bushel)

                                   Demand facing
                                   competitive firm
                     $13                                $13


                      0    Quantity (bushels per day)     0             Quantity
                                                              (thousands of bushels per day)

   The demand curve facing the
    monopoly firm is identical to the
    market demand curve for the product.
   Monopoly is a firm that produces the
    entire market supply of a particular
    good or service.
    Price and Marginal Revenue
   Unlike competitive firms, marginal
    revenue for a monopolist is not equal to
       Profit-maximization rule – Produce at that
        rate of output where MR = MC.
   So long as the demand curve is
    downward-sloping, MR will always be
    less than price.
   The MR curve lies below the demand
    (price) curve at every point but the first.
Price and Marginal Revenue

Quantity   Price    Total    Marginal
                   Revenue   Revenue
   1       $13       $13       —
   2        12        24       $11
   3        11        33         9
   4        10        40         7
   5         9        45         5
   6         8        48         3
   7         7        49         1
Price and Marginal Revenue

                     $14   A
                      12                   C
Price (per beshel)

                      10                                   E
                                       c                           F
                       8                                                   G       Demand
                                               d                                   (= price)
                                                               f       Marginal revenue
                       0   1       2    3     4     5     6    7               8       9       10
                                       Quantity (bushels per hour)
Profit Maximization
                              13                                               Average
                                                                              total cost
Price or Cost (per bushel)

                              11                           D
                               9   Profits
                               7                            d
                               5                                                  Demand
                               3             Marginal
                               2              cost                            Marginal
                               1                                              revenue
                               0      1      2    3       4     5      6      7       8    9
                                                 Quantity (bushel per hour)
The Monopoly Price

   The intersection of the marginal
    revenue and marginal cost curves
    establishes the profit-maximization
    rate of output.
   The demand curve tells us how much
    consumers are willing to pay for that
                          Initial Conditions in the Monopolized
                          Computer Market
                                                  Monopoly outcome                                             Competitive
          $1200                       W                            1200                                A       market
                                                    Competitive                                                supply
                       1000                   C                                          1000              X
                                                  Average total cost

                                                                         Price (per computer)
Price (per computer)

                       800                                                                      800
                                          M                                                                        Market
                       600                    B                                                                    demand

                       400                      Demand                                          400
                                                curve facing
                              Marginal          single plant
                       200    cost                                                              200
                                                 Marginal revenue
                                                    of single plant
                         0     200 400       800       1200       1600                            0   24,000
                                Quantity (computers per month)                                          Quantity
                                                                                                  (computers per month)
Monopoly Profits

   A monopoly receives larger profits
    than a comparable competitive
    industry by reducing the quantity
    supplied and pushing prices up.
                       Monopoly Profits

                       Monopolist's equilibrium
                                                      MC   Competitive short-run
                        $1100                     A
Price (per computer)

                                R                      X         ATC
                                Monopoly                                    Competitive
                                profit                                  long-run equilibrium
                           T                          U             V

                                                                          Market demand
                            0                qM qC         Quantity (computers per month)
Barriers to Entry

   High barriers to entry prevent profit-
    hungry entrepreneurs from entering
    the market to compete monopoly
    profits away.
   Monopoly profits persist as long as
    barriers to entry prevent competitors
    from entering the market.
     Comparison of Market Structures

Competitive                        Monopoly
   High prices and profits           High prices and profits
    signal consumers’ demand           signal consumers’ demand
    for more output.
   The high profits attract new       for more output.
    suppliers.                        Barriers to entry are erected
   Production and supplies            to exclude potential
    expand.                            competition.
   Prices slide down the             Production and supplies are
    market demand curve.
   Price equals marginal cost         constrained.
    at all times.                     Price exceeds marginal cost
   There is a squeeze on              at all times.
    profits and thus pressure to      There is no squeeze on
    reduce costs or improve
    product quality.                   profits and thus no pressure
                                       to reduce costs or improve
                                       product quality.
Monopoly Industry

   Because monopoly markets do not
    tend towards marginal cost pricing,
    consumers do not get the mix of output
    that delivers the most utility from
    available resources.
   Not allocative efficiency.
The Limits to Power

   Monopolists are still subject to market
    demand curves.
   The greater the price elasticity of
    demand, the more a monopolist will be
    frustrated in its attempts to establish
    both high prices and high volume.
Price Discrimination

   A monopolist may be able to extract
    greater profits by practicing price
   Price discrimination is the sale of an
    identical good at different prices to
    different consumers by a single seller.
    Entry Barriers

   Patents – offers a producer 20 years of exclusive rights
    to produce a particular product.
   Monopoly franchises – governments create and
    maintain monopolies by giving a single firm the exclusive
    right to supply a particular good or service.
   Control of key inputs – a company may lock out
    competition by securing exclusive access to key inputs.
   Acquisition – when all else fails, purchase a
    potential competitor.
   Economies of scale – a monopoly may persist because
    of cost advantages over smaller firms
Research and Development

   Monopolies could benefit society.
   Because of their greater profits,
    monopolists have a greater advantage
    in pursuing research and development.
   They do not have a clear incentive to
    do so.
Entrepreneurial Incentives

   Market power can be an incentive for
    entrepreneurial activity.
   An innovator can make substantial
    profits in a competitive market before
    the competition catches up.
Economies of Scale

   If economies of scale exist, the
    monopolist may attain much greater
    efficiency than a large number of
    competitive firms.
   There is no guarantee that such
    economies of scale will exist in a given
Natural Monopolies

   A natural monopoly is an industry in
    which one firm can achieve economies
    of scale over the entire range of
    market supply.
   Economies of scale act as a “natural”
    barrier to entry.
Structure vs. Behavior

   The structure of monopoly is, in itself,
    not a problem.
   If potential rivals force a monopolist to
    behave like a competitive firm, then a
    monopoly imposes no cost on
    consumers or on society at large.
    Antitrust Laws

   The legal foundations for antitrust intervention
    are contained in three landmark antitrust laws.
       Sherman Act (1890) – prohibits “conspiracies in
        restraint of trade.
       Clayton Act (1914) – principally aimed at preventing
        the development of monopolies by prohibiting price
        discrimination, exclusive dealing agreements, certain
        types of mergers, and interlocking boards of
        directors among competing firms.
       The Federal Trade Commission Act (1914) –
        created the FTC to study industry structures and
        behavior so as to identify anti-competitive practices.

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