Chapter 13

patent

A barrier to entry that grants exclusive use of the patented product or process to the inventor.

Federal Trade Commission (FTC)

A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law.

Demand in Monopoly Markets

A monopolist does not constitute a small part of the market; it is the market. The monopolist sets the market price by looking at the trade-off in terms of profit earned between getting more money for each unit sold and selling fewer units.

The Absence of a Supply Curve in Monopoly

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 its marginal cost curve and the demand curve that it faces.

Forms of Imperfect Competition and Market Boundaries

A monopoly is an industry with a single firm in which the entry of new firms is blocked. An oligopoly is an industry that has a small number of firms, each large enough so that its presence affects prices. Firms that differentiate their products in industries with many producers and free entry are called monopolistic competitors.

rent-seeking behavior

Actions taken by households or firms to preserve economic profits

market power

An imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product.

imperfectly competitive industry

An industry in which individual firms have some control over the price of their output.

natural monopoly

An industry that realizes such large economies of scale that single-firm production of that good or service is most efficient.

pure monopoly

An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.

Ownership of a Scarce Factor of Production

If production requires a particular input and one firm owns the entire supply of that input, that firm will control the industry.

Government Rules

In some cases, governments impose entry restrictions on firms as a way of controlling activity.

Examples of Price Discrimination

Movie theaters, hotels, and many other industries routinely charge lower prices for children and elderly people than for others. With price discrimination, the objective of the firm is to segment the market into different identifiable groups, with each group having a different elasticity of demand. The optimal strategy for a firm that can sell in more than one market is to charge higher prices in markets with low demand elasticities.

perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

government failure

Occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of government.

Clayton Act

Passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers.

price discrimination

Charging different prices to different buyers for identical products, where these price differences are not an inflection of cost differences.

barriers to entry

Factors that prevent new firms from entering and competing in imperfectly competitive industries.

rule of reason

The criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within the terms of the Sherman Act.

Our focus in this chapter on pure monopoly has served a number of purposes:

The monopoly model describes a number of industries quite well. The monopoly case shows that imperfect competition leads to an inefficient allocation of resources. The analysis of pure monopoly offers insights into the more commonly encountered market models of monopolistic competition and oligopoly, which we will discuss in detail in the next two chapters.

deadweight loss or excess burden of a monopoly

The social cost associated with the distortion in consumption from a monopoly price.

The Sherman Act of 1890

The substance of the Sherman Act is contained in two short sections: Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.... Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

network externalities

The value of a product to a consumer increases with the number of that product being sold or used in the market.