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Chapter
13
Monopoly
and Antitrust Policy
Prepared by:
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
PART III MARKET IMPERFECTIONS AND THE ROLE OF GOVERNMENT
Monopoly
and Antitrust Policy
13
Chapter Outline
Imperfect Competition and Market Power:
Core Concepts
Defining Industry Boundaries
Barriers to Entry
Price: The Fourth Decision Variable
Price and Output Decisions in Pure Monopoly Markets
Demand in Monopoly Markets
Perfect Competition and Monopoly Compared
Collusion and Monopoly Compared
The Social Costs of Monopoly
Inefficiency and Consumer Loss
Rent-Seeking Behavior
Price Discrimination
Examples of Price Discrimination
Remedies for Monopoly: Antitrust Policy
The Development of Antitrust Law: Historical Background
Landmark Antitrust Legislation
The Enforcement of Antitrust Law
Initiating Antitrust Actions
ETP A HC
Imperfect competition does not mean that no competition exists in the market. In some
imperfectly competitive markets competition occurs in more arenas than in perfectly
competitive markets. Firms can differentiate their products, advertise, improve quality,
market aggressively, cut prices, and so forth.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 38
IMPERFECT COMPETITION AND MARKET
POWER: CORE CONCEPTS
DEFINING INDUSTRY BOUNDARIES
The ease with which consumers can substitute for a product limits the extent to which a
monopolist can exercise market power. The more broadly a market is defined, the more
difficult it becomes to find substitutes.
ETP A HC
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IMPERFECT COMPETITION AND MARKET
POWER: CORE CONCEPTS
BARRIERS TO ENTRY
Government Franchises
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IMPERFECT COMPETITION AND MARKET
POWER: CORE CONCEPTS
Patents
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IMPERFECT COMPETITION AND MARKET
POWER: CORE CONCEPTS
Price is a decision variable for imperfectly competitive firms. Firms with market
power must decide not only (1) how much to produce, (2) how to produce it, and
(3) how much to demand in each input market (see Figure 7.3), but also (4) what
price to charge for their output.
ETP A HC
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
FIGURE 13.2 The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic; in
a Monopoly, the Market Demand Curve Is the Demand Curve Facing the Firm
ETP A HC
With one firm in a monopoly market, there is no distinction between the firm and the
industry. In a monopoly, the firm is the industry. The market demand curve is the demand
curve facing the firm, and the total quantity supplied in the market is what the firm decides to
produce. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 38
PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
0 $11 0 −
1 10 $10 $10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 −2
8 3 24 −4
9 2 18 −6
10 1 10 −8
ETP A HC
For a monopolist, an increase in output involves not just producing more and selling it, but
also reducing the price of its output to sell it.
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
ETP A HC
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
All firms, including monopolies, raise output as long as marginal revenue is greater than
marginal cost. Any positive difference between marginal revenue and marginal cost can be
thought of as marginal profit.
The profit-maximizing level of output for a monopolist is the one at which marginal revenue
equals marginal cost: MR = MC.
A monopoly firm has no supply curve that is independent of the demand curve for its
product.
A monopolist sets both price and quantity, and the amount of output that it supplies
depends on both its marginal cost curve and the demand curve that it faces.
ETP A HC
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
If a firm can reduce its losses by operating in the short run, it will do so.
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
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PRICE AND OUTPUT DECISIONS IN PURE
MONOPOLY MARKETS
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THE SOCIAL COSTS OF MONOPOLY
RENT-SEEKING BEHAVIOR
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PRICE DISCRIMINATION
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REMEDIES FOR MONOPOLY:
ANTITRUST POLICY
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REMEDIES FOR MONOPOLY:
ANTITRUST POLICY
price.
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REMEDIES FOR MONOPOLY:
ANTITRUST POLICY
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REMEDIES FOR MONOPOLY:
ANTITRUST POLICY
The Clayton Act and the Federal Trade
Commission, 1914
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THE ENFORCEMENT OF ANTITRUST LAW
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THE ENFORCEMENT OF ANTITRUST LAW
Consent Decrees
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THE ENFORCEMENT OF ANTITRUST LAW
Criminal Actions
Treble Damages
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A NATURAL MONOPOLY
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A NATURAL MONOPOLY
Economies of scale must be realized at a scale that is close to total demand in the market.
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A NATURAL MONOPOLY
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IMPERFECT MARKETS: A REVIEW
AND A LOOK AHEAD
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REVIEW TERMS AND CONCEPTS
market power
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