Chapter 10: Monopoly and Antitrust Policy

Government Block Entry

- Granting a Patent, copyright, or trademark to an individual or a firm, giving it the exclusive right to produce a product. - Granting a firm a public franchise, making it the exclusive legal provider of a good or service.

Conclusion

- The more intense the level of competition among firms, the better a market works. - In a Monopoly, the price of a good or service is higher, output is lower, and consumer surplus and economic efficiency are reduced.

High Barries to Entry a Monopoly

1. Government action blocks the entry of more than one firm into a market. 2. One firm has control of a key Resource necessary to produce a good 3. There are important network externalities in supplying the good or service. 4. Economists of scale are so large that one firm has a natural monopoly.

Guidelines for whether the Government was likely to allow the merger or to oppose it

1. Market Definition 2. Measure of Concentration 3. Merger Standards.

Merger Standards

1. Postmerger HHI below 1500 - not concentrated 2. Postermerger HHI between 1500 - 2500 = moderately concentrated 3. Postermeger HHI above 2500 = highly concentrated.

Effects of Monopoly

1. Reduction in consumer surplus 2. Increase in producer surplus 3. Causes a Deadweight Loss, which represents a reduction in economic efficiency.

What happens if a Perfectly Competitive Market becomes a Monopoly?

1. The industry supply curve become the monopolist's marginal cost curve. 2. The monopolist reduces output to where marginal revenue equals marginal cost. 3. The monopolist raises the price from Pc to Pm

Complication associated with Merger Policy

1. The new firm would have too much market power. 2. The possibility that the newly merged firm might be more efficient than the merging firms were individually. - Sometimes a merged firm will be more efficient and has lower costs, and other times it won't.

How does a Monopoly Choose Price and Output?

A Monopoly maximizes profit by producing where Marginal Revenue equals Marginal Cost (MR = MC)

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute. It can ignore the actions of all other firms. - Ignore the prices others firms charge. - Other firms must not be producing There are no other firms selling a substitute close enough that its economic profits are competed away in the long run. Ex. Local Electric company and Candles

Public Franchise

A government designation that a firm is the only legal provider of a good or service.

Copyright

A government-granted exclusive right to produce and sell a creation. - During the creator's lifetime.

Measure of Concentration

A market is concentrated if a relatively small number of firms have a large share of total sales in the market. - Highly Concentrated = very likely to Increase market power. - Low Concentration = unlikely to increase market power and can be ignored.

Market Definition

A markets consists of all firms making products that consumers view as close substitutes.

Vertical Mergers

A merger between firms a different stages of production of a good. Ex. Soft drinks and Aluminum Cans

Horizontal Mergers

A merger between firms in the same industry - Merging to raise prices and reduce output. Ex. Two airlines

Clayton Act

A merger was illegal if its effect was "substantially to lessen competition, or to tend to create a monopoly".

How do Monopolies differs from Other firms

A monopoly's demand curve is the same as the market demand curve for the product.

Natural Monopoly

A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms. - "Room" in the market for only one firm. Ex. Electricity

Network Externalities

A situation in which the usefulness of a product increases with the number of consumers who use it. - It might be difficult for new firms to enter the market and compete away the profit being earned by the first firm in the market. - Barrier to entry in the business world.

Benefit from Firms having Market Power

Economics progress depends on Technological change in form of new products. - The higher prices firms charge are unimportant compared with the benefits from the new products these firms introduce to the market.

Economies of Scale

Exist when a firm's long-run average costs falls as it increases the quantity of output it produces.

Consider a firm to have a Monopoly

Firms are unable to compete away its profit in the long run.

Trademark - "Brand Names"

Grants a firm legal protection against other firms using its product's name. - Exclusive control over their products.

Market Power

The ability of a firm to charge a price greater than marginal cost. - Where some loss of economic efficiency will occur whenever a firm has market power. - Firms in Perfectly Competitive markets do no have market power.

Patent

The exclusive right to a product for a period of 20 years from the date the patent is filed with the government.

Regulating Natural Monopolies

The price should be equal to the level of Average Total Cost (ATC) at which the demand curve intersects the ATC curve. - Monopolies are able to break even, although the quantity is below the efficient quantity.

Collusion

Useful in analyzing situations in which firms agree to collude, or not complete, and act together as if they were a monopoly. - Collusion is illegal in the United States.

Collusion in Government Policy toward Monopoly

An agreement among firms to charge the same price or otherwise not to compete.

Control of a Key Resource

A way for a firm to become a monopoly by buying nearly all the resources available. Ex. Control of large stadiums.

Antitrust Laws

Laws aimed at eliminating collusion and monopoly by promoting competition among firms - Prevent higher prices that reduce consumer surplus and economic efficiency.

Consumer Surplus

Measures the net benefit received by consumers from purchasing a good or service. - Area below the demand curve and above the market price.

Producer Surplus

Measures the net benefit to producers from selling a good or service. - Area above the supply curve and below the market price.

Equilibrium in a Monopoly

Monopolies will produce less and charge a higher price than would a perfectly Competitive industry producing the same good. Monopoly reduces the quantity of a good or service that would have been produced if the industry were Perfectly Competitive and increases the price.

Economic Surplus

Provides a way of characterizing the economic efficiency in a market.

Deadweight Loss

Represent the loss of economic efficiency = A Monopoly produces the profit maximizing level of output but fails to produce the efficient level of output from the point of view of society.

Requirement for Economic Efficiency

Requires the last unit of a good or service produced to provide an additional benefit to consumers equal to the additional cost of producing it. P = MC

Equilibrium in a Perfectly Competitive Market

Results in the greatest amount of economic surplus, or total benefit to society, from the production of a good or service.