Chapter 14: Monopoly and Antitrust Policy

What is market power?

the ability of a firm to charge a price greater than marginal cost

From what do entry barriers result in a monopoly?

1. government blocking the entry of more than one firm into a market 2. control over an input necessary to produce a product 3. important network externalities 4. economies of scale so large that one firm has a natural monopoly

What did the Sherman Act prohibit?

1. price fixing 2. collusion 3. monopolization

What was the significance of the Sherman Act?

1. targeted firms that combined to form trusts

Compared to a perfectly competitive industry, a monopolist:

1. will charge a higher price and produce less 2. will reduce the amount of consumer surplus 3. will increase the amount of produce surplus

What is a monopoly?

a firm that is the only seller of a good or service that does not have a close substitute

What is a natural monopoly?

a situation in which one firm can supply the entire market at a lower average total cost than can two or more firms

What is collusion?

an agreement among firms to charge the same price for or otherwise not compete

What must occur for a monopoly to exist?

barriers to entering the market must be so high that no other firms can enter

Why does a monopoly generate a loss in economic efficiency relative to a perfectly competitive market?

because a monopolist's profit-maximizing price exceeds marginal cost

How may the government block the entry of firms?

by granting a patent or copyright to an individual or firm, or by granting a public franchise that makes one firm the exclusive provider of a good or service q

How does a monopoly firm maximize profit?

by producing the quantity of output that makes marginal revenue equal to marginal cost

What is a patent?

the exclusive right to a product for a period of 20 years from the date the product was invented

What happens when a monopoly increases the price and reduces the quantity produced?

the monopolist reduces economic surplus and creates a deadweight loss

Describe a monopoly firm's demand curve?

the same as the market demand curve for the product it sells

What are antitrust laws used for?

to make illegal collusion and attempts by firms to form monopolies

When will a monopoly earn an economic profit?

when it's price exceeds its average total cost at the output where marginal revenue equals marginal cost

When do network externalities exist in the consumption of a product?

when the value of the product increases with the number of people who are using it

What are vertical mergers?

mergers between firms at different stages of production of a good

What are horizontal mergers?

mergers between firms in the same industry