Chapter 15
Monopoly and Antitrust Policy
Monopoly
a market structure consisting of a firm that is the only seller of a good or service that does not have a close substitute. Monopoly exists at the opposite end of the competition spectrum from perfect competition.
We study monopolies for two reasons:
1. Some firms truly are monopolists, so it is important to understand how they behave 2. Firms might collude in order to act like a monopolist, with important implications for firm behavior.
Are There Really Monopolies?
1. It has competition from other fast-food restaurants 2. It has competition from grocery stores that provide pizzas for you to cook at home. If you consider these alternatives to be close substitutes for pizzeria pizza, then the pizza restaurant is not a
Is Google a Monopoly?
Although there are many other firms that offer search engines, Google has a dominant market share: 70% in the U.S., and 90% in Europe. In the strictest sense, Google is not a monopoly in the search-engine market. But its dominant market position provides
Reasons Why Monopolies Exist
For a firm to exist as a monopoly, there must be barriers to entry preventing other firms coming in and competing with it.
The four main reasons for these barriers to entry are:
1. Government restrictions on entry 2. Control over a key resource 3. Network externalities 4. Natural monopoly
In the U.S., governments block entry in two main ways:
1. Patents, copyrights, and trademarks 2. Public franchises
Patents, copyrights, and trademarks
Newly developed products like drugs are frequently granted patents, the exclusive right to produce a product for a period of 20 years from the date the patent is filed with the government. Similarly, copyrights provide the exclusive right to produce and s
Public Franchises
A government designation that a firm is the only legal provider of a good or service is known as a public franchise. These might exist, for example, in electricity or water markets.
Control Over a Key Resource
For many years, the Aluminum Company of America (Alcoa) either owned or had long-term contracts for almost all the world's supply of bauxite, the mineral from which we obtain aluminum. Such control over a key resource served as a substantial barrier to en
Network Externalities
Economists refer to network externalities as a situation in which the usefulness of a product increases with the number of consumers who use it. Examples: HD televisions , Computer operating systems (like Windows), and Social networking sites (like Facebo
4. Natural Monopoly
A natural monopoly occurs when 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. In the market for electricity delivery, a single firm (point A) can deliver electricity at
The Return of Marginal Cost and Marginal Revenue
In our study of oligopoly, we abandoned the idea of marginal cost and marginal revenue, because the strategic interaction between firms overrode these concepts. Monopolists have no competitors, and hence no concern about strategic interactions. They seek
Total revenue
Price x Quantity
Average Revenue
TR/Q
Marginal Revenue
Change in total revenue/change in quantity
As the monopolist seeks to expand its output, two effects occur:
1. Revenue increases from selling an additional unit of output at whatever price is necessary to convince an additional customer to purchase it 2. Revenue decreases, because the price reduction is shared with existing customers. So marginal revenue is alw
Profit-Maximizing Price and Output for a Monopoly
The monopolist maximizes profit by producing the quantity where the additional revenue from the last unit (marginal revenue) just equals the additional cost incurred from its production (marginal cost). MC = MR determines quantity for a monopolist. At thi
Long-Run Profits for a Monopoly
Since there are barriers to entry, additional firms cannot enter the market. So there is no distinction between the short run and long run for a monopoly. Then, unlike for monopolistic competitors, we expect monopolists to continue to earn profits in the
Comparing Monopoly and Perfect Competition
Suppose that a market could be characterized by either perfect competition or monopoly. Which would be better? The thought experiment here is to suppose there is some market that is perfectly competitive, such as the market for smartphones. Then a single
If a Perfect Competition Became a Monopoly...
Quantity will fall and price will rise. The market for smartphones is initially perfectly competitive. Price is PC, quantity traded is QC. Now the market is supplied by a single firm. Since the single firm is made up of all of the smaller firms, the margi
Quantity Will Fall and Price will rise
But the new firm maximizes market profit, producing the quantity where marginal cost equals marginal revenue (MC = MR). This quantity (QM) is lower than the competitive quantity (QC) and the firm charges the corresponding price on the demand curve, PM. Th
Measuring the Efficiency Losses from Monopoly
Fewer smartphones will be traded at a higher price. Consumer surplus will fall (with the higher price). Producer surplus must rise, otherwise the firm would have chosen the perfectly competitive price and quantity.
Could the increase in producer surplus offset the decrease in consumer surplus?
No! Perfectly competitive markets maximized the economic (total) surplus in a market; if fewer trades take place, the economic surplus must fall.
The Inefficiency of Monopoly
With the higher monopoly price, consumer surplus decreases by the areas A+B. Producer surplus falls by C, but rises by A; an overall increase. Area A is simply a transfer of surplus: neither inherently good nor bad. But areas B and C are lost surpluses: d
5 things that change from perfect competition to a monopoly
Total surplus goes down, consumer surplus falls, producer surplus rises, quantity will fall, and price will rise.
How Large Are the Efficiency Losses?
There are relatively few monopolies, so the loss of economic efficiency due to monopolies must be relatively small. But many firms have market power: the ability of a firm to charge a price greater than marginal cost. In fact, the only firms that do not h
What firms have market power
Any firms that has ability to sell products above the price
What type of business does not have market power
Perfectly competitive market
Why is the effect of market power so low
Most firms face a relatively large degree of competition, resulting in prices much closer to marginal cost than we would see with monopolies. So deadweight loss due to market power is relatively small.
...
Market power may produce some benefit for an economy; the prospect of market power (and the resulting economic profits) drives firms to innovate, creating new products and services. This drive affects large firms�who reinvest profits in the hope of making
Antitrust Laws and Antitrust Enforcement
In the 1870s and 1880s, several "trusts" had formed: boards of trustees that oversaw the operation of several firms in an industry, and enforced collusive agreements. This helped prompt U.S. antitrust laws, aimed at eliminating collusion and promoting com
Sherman Act 1890
Prohibited "restraint of trade" including price fixing and collusion. Also outlawed monopoiation
Federal Trade Commission Act 1914
Established that Federal Trace Comission (FTC) to help administer antitrust laws
Robinson-Patman Act 1936
Prohibited firms from charging buyers different prices if the result would reduce competition
Cellar- Cellar Kefauver 1950
Toughened restricted on mergers by prohibiting any mergers that would reduce competition
Mergers without Efficiency Gains
The Federal government is particularly concerned about horizontal mergers: mergers between firms in the same industry, as opposed to vertical mergers between two firms at different stages of the production process. Such mergers are likely enhance firms' m
Mergers with Efficiency Gains
Firms seeking to merge typically argue that the resulting larger firm will have lower costs, and hence be able to produce more efficiently. Then even if they charge the (new) monopoly price, the result is an improvement for consumers. However, costs may n
DOJ and FTC Merger Guidelines
Economists and lawyers at the Department of Justice and the Federal Trade Commission developed guidelines for themselves and firms to use in evaluating whether potential merger was acceptable.
These include: Market definition, Measure of concentration, an
Market Definition
Suppose Hershey Foods sought to merge with Mars Inc. In what market do these firms compete? The market for candy? The market for snacks? The market for all food? The more broadly defined the market, the smaller (and more harmless) the merger appears.
To determine the appropriate scope of the market, the government
tries to determine which goods are close substitutes for those produced by the firms. The "appropriate market" is defined as the smallest market containing the firms' products for which an overall price rise within the market would result in total market
Measure of Concentration
A market is concentrated if a relatively small number of firms have a large share of total sales in the market. To determine if a market is concentrated, the government uses the Herfindahl-Hirschman Index (HHI), created by squaring the percentage market s
Calculating HHI
Take the market share of each business and square them then add it. Ex. Market share 50%. 50%, 50%; 50^2 + 50^2= 10,000. The higher the HHI, the more businesses there are
Post-merger HHI 1500
<100 challenge unlikely, 100-200 challenge unlikely, >200 challenge unlikely
Post-merger HHI 1,500-2,00
>100 challenge unlikely, 100-200 challenge is positive, >200 challenge possible
Post-merger HHI >2,500
<100 challenge unlikely, 100-200 challenge possible, >200 challenge very likely
Regulating Natural Monopolies
Natural monopolies have the potential to serve customers more cheaply than multiple firms. But the usual market forces that drive prices down do not exist. Local and/or state regulatory commissions typically set prices for these natural monopolies, instea
Ideal cost for consumers
Price equals marginal cost
Questions when regulating monopolies
what price should the regulators choose? A price that makes the monopoly make zero profit? The efficient price that would maximize consumer welfare?
Regulating a Natural Monopoly
If the natural monopoly were not subject to regulation, it would choose quantity QM and price PM. Efficiency (MC = MR) suggests a price of QE. But then the firm makes a loss. The typical compromise is to allow the firm to charge a price where it can make
Everything is paid for if
Average total cost is equal to demands
Common Misconceptions to Avoid
Monopoly is a market structure; natural monopoly is a reason the monopoly market structure might exist. Monopolies need not be natural monopolies. No monopolist, not even a natural monopolist, tries to minimize cost. MC = MR guides an (unregulated) monopo