Microeconomics
ECON 2302
Summer I, 2011
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 14
Assignments for studying Ch. 14:
Pre-read Ch. 14, including:
 Review Questions: 3rd ed. p 486, 1.1; p 487, 2.1, 2.2, 2.4; p 487-
488; 3.1, 3.2; p 489 4.1, 4.2, 5.1, 5.2, 5.3 (2nd ed., p. 498, 1.1; p. 499,
2.1, 2.2 & 2.4; p. 500, 3.1 & 3.2; p. 501,4.1, 4.2, 5.1, 5.2 & 5.3; 1st
edition: 1-4, & 6-12 on pp. 468-469); and
 Problems and Applications: 3rd ed., p. 486, 1.5; p. 487, 2.6, 2.8;
p. 488, 3.6; p. 489, 4.6; p. 489-490, 5.4, 5.5 & 5.8 (2nd ed., p. 498:
1.4; p. 499: 2.6 & 2.8; p. 500, 3.6; p. 501, 4.6; p. 502, 5.4, 5.5 & 5.6;
1st edition: 3, 4, 8, 9, 10, 11, 20 & 28 on pp. 469-472);
CHAPTER
14
Monopoly & Antitrust Policy
Until 2008, Time Warner Cable was the
only provider of cable TV in Manhattan;
Time Warner had a monopoly.
CHAPTER
14
Monopoly and Antitrust Policy
Chapter Outline and 5 Learning Objectives
14.1
Is Any Firm Ever really a Monopoly?
Define monopoly.
14.2
Where Do Monopolies Come From?
Explain the four main reasons monopolies arise.
14.3
How Does a Monopoly Choose Price and Output?
Explain how a monopoly chooses price and output.
14.4
Does Monopoly Reduce Economic Efficiency?
Use a graph to illustrate how a monopoly affects
economic efficiency.
14.5
Government Policy toward Monopoly
Discuss government policies toward monopoly.
14.1 LEARNING OBJECTIVE
Define monopoly.
Is Any Firm Ever Really a Monopoly?
Monopoly A firm that is the only seller of a good or
service that does not have a close substitute.
Making
Is the Xbox 360 a Close Substitute for the
Connection PlayStation 3?
the
With consumers apparently
viewing the two systems
primarily as game
consoles, the Xbox had a
significant advantage
because it was priced $100
less than the PS3.
To many gamers, Microsoft’s Xbox is
a better deal than PlayStation 3.
14.2 LEARNING OBJECTIVE
Explain the four main reasons monopolies arise.
Where Do Monopolies Come From?
To have a monopoly, barriers to entering the market must be
so high that no other firms can enter.
Barriers to entry may be high enough to keep out competing
firms for four main reasons:
1. A government 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. Economies of scale are so large that one firm has a natural
monopoly.
Where Do Monopolies Come From?
1. Entry Blocked by Government Action:
1. In the US, governments block entry in 2 main ways:
A. By granting a patent or copyright to an individual or
firm, giving it the exclusive right to produce a product.
B. By granting a firm a public franchise, making it the
exclusive legal provider of a good or service.
Where Do Monopolies Come From? Entry
Blocked by Government Action, cont.
A. Patents and Copyrights
Patent The exclusive right to a product for a period of 20
years from the date the product is invented.
Copyright A government-granted exclusive right to
produce and sell a creation.
B. Public Franchises
Public franchise A government designation that a firm is
the only legal provider of a good or service.
Making
The End of the Christmas
Connection Plant Monopoly
the
After a university researcher
discovered the technique for
growing poinsettias, new firms
quickly entered the industry, and
the price of poinsettias
plummeted. Soon consumers
could purchase them for as little
as three for $10. At those prices,
the Ecke family’s firm was
unable to earn economic profits.
At one time, the Ecke family had a
monopoly on growing poinsettias, but
many new firms entered the industry.
Where Do Monopolies Come From?
2. Control of a Key Resource
Another way for a firm to become a monopoly is by
controlling a key resource.
3. Network Externalities
Network externalities A situation in which the
usefulness of a product increases with the number of
consumers who use it.
Making
Are Diamond Profits Forever?
Connection The De Beers Diamond Monopoly
the
Whether consumers will pay
attention to brands on diamonds
remains to be seen, although
through 2009, the branding
strategy had helped De Beers
maintain its 40 percent share of
the diamond market.
De Beers promoted the
sentimental value of diamonds
as a way to maintain its
position in the diamond market.
Where Do Monopolies Come From?
4. Natural Monopoly
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.
With a natural monopoly,
the average total cost
curve is still falling when
it crosses the demand
curve (point A).
If only one firm is
producing electric power
in the market, and it
produces where average
cost intersects the
demand curve, average
total cost will equal
$0.04 per kilowatt-hour
of electricity produced.
If the market is divided
between two firms, each
producing 15 billion
kilowatt-hours, the
average cost of
producing electricity
rises to $0.06 per
kilowatt-hour (point B).
Natural Monopoly
FIGURE 14-1 Average Total Cost Curve for a Natural Monopoly
In this case, if one firm expands production, it can
move down the average total cost curve, lower its
price, and drive the other firm out of business.
14.3 LEARNING OBJECTIVE
Explain how a monopoly chooses price and output.
How Does a Monopoly Choose Price and Output?
Marginal Revenue Once Again:
When a firm cuts the price of a product, one good thing
happens, and one bad thing happens:
 The good thing. It sells more units of the product.
 The bad thing. It receives less revenue from each
unit than it would have received at the higher price.
Time Warner Cable faces a
downward-sloping D curve
for subscriptions to basic
cable.
To sell more subscriptions, it
must cut P. When this
happens, it gains revenue
from selling more
subscriptions but loses
revenue from selling at a
lower P the subscriptions
that it could have sold at a
higher P. The firm’s MR is
the change in revenue from
selling another subscription.
We can calculate MR by
subtracting the revenue lost
as a result of a price cut from
the revenue gained.
The table shows that Time
Warner’s MR is < P for
every subscription sold after
the first subscription.
Marginal Revenue Once Again
FIGURE 14-2 Calculating a Monopoly’s Revenue
Therefore, Time Warner’s MR curve will be below its D curve.
Panel (a) shows that to
maximize p, Time Warner
should sell subscriptions
up to the point where the
MR from selling the last
subscription equals its MC
(point A).
Profit Maximization for a Monopolist
FIGURE 14-3 Profit-Maximizing Price and Output for a Monopoly
In panel (b), the green box represents Time Warner’s
profits. Time Warner’s profit equals $12 × 6 = $72.
Solved Problem
14-3
Finding the Profit-Maximizing Price and Output for a Monopolist
TOTAL
REVENUE
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
TOTAL
COST
MARGINAL COST
(MC = ΔTC/ΔQ)
PRICE
QUANTITY
$17
3
$51
–
$56
–
16
4
64
$13
63
$7
15
5
75
11
71
8
14
6
84
9
80
9
13
7
91
7
90
10
12
8
96
5
101
11
Don’t Let This Happen to YOU!
Don’t Assume That Charging a Higher Price Is Always More Profitable for a Monopolist
14.4 LEARNING OBJECTIVE
Use a graph to illustrate how a monopoly affects economic efficiency.
Does Monopoly Reduce Economic Efficiency?
Comparing Monopoly and Perfect Competition
FIGURE 14-4 What Happens If a Perfectly Competitive Industry Becomes a Monopoly?
In panel (a), the market for television
sets is perfectly competitive, and P and
Q are determined by the intersection of
the demand and supply curves.
In panel (b), the perfectly competitive
television industry became a monopoly.
As a result, the equilibrium Q falls, and
the equilibrium P rises.
Does Monopoly Reduce Economic Efficiency?
Measuring the Efficiency Losses from Monopoly
A monopoly charges a
higher price, PM, and
produces a smaller
quantity, QM, than a
perfectly competitive
industry, which
charges price PC and
produces QC.
The higher P reduces
CS by the area equal
to the rectangle A and
the triangle B.
Some of the reduction
in CS is captured by
the monopoly as PS,
and some becomes
DWL, which is the
area equal to triangles
B and C.
FIGURE 14-5 The Inefficiency of Monopoly
Does Monopoly Reduce Economic Efficiency?
Measuring the Efficiency Losses from Monopoly
We can summarize the effects of monopoly as follows:
1. Monopoly causes a reduction in consumer surplus.
2. Monopoly causes an increase in producer surplus.
3. Monopoly causes a deadweight loss, which
represents a reduction in economic efficiency.
How Large Are the Efficiency Losses Due to
Monopoly?
Market power The ability of a firm to charge a price greater
than marginal cost.
Market Power and Technological Change
The introduction of new products requires firms to spend
funds on research and development.
Because firms with market power are more likely to earn
economic profits than are perfectly competitive firms, they
are also more likely to carry out research and development
and introduce new products.
14.5 LEARNING OBJECTIVE
Discuss government policies toward monopoly.
Government Policy toward Monopoly
Collusion An agreement among firms to charge the same
price or otherwise not to compete.
Antitrust Laws and Antitrust Enforcement
Antitrust laws Laws aimed at eliminating collusion and
promoting competition among firms.
Antitrust Laws and Antitrust Enforcement
Table 14-1 Important U.S. Antitrust Laws
LAW
DATE
PURPOSE
Sherman Act
1890
Prohibited “restraint of trade,” including price fixing
and collusion. Also outlawed monopolization.
Clayton Act
1914
Prohibited firms from buying stock in competitors and
from having directors serve on the boards of
competing firms.
Federal Trade
Commission Act
1914
Established the Federal Trade Commission (FTC) to
help administer antitrust laws.
Robinson-Patman
Act
1936
Prohibited charging buyers different prices if the result
would reduce competition.
Cellar-Kefauver Act
1950
Toughened restrictions on mergers by prohibiting any
mergers that would reduce competition.
Mergers: The Trade-off between Market Power and Efficiency
Horizontal merger A merger between firms in the same
industry.
Vertical merger A merger between firms at different stages
of production of a good.
Mergers: The Trade-off between Market Power and Efficiency
This figure shows the
result of all the firms in a
perfectly competitive
industry merging to form a
monopoly.
If the monopoly has lower
costs than the perfectly
competitive firms, as
shown by the marginal
cost curve shifting to MC
after the merger, it is
possible that the price will
actually decline from PC to
PMerge and that output will
increase from QC to QMerge
following the merger.
FIGURE 14-6 A Merger That Makes Consumers Better Off
The Department of Justice and FTC Merger Guidelines
The guidelines have three main parts:
1. Market definition
2. Measure of concentration
3. Merger standards
1. Market Definition
A market consists of all firms making products that
consumers view as close substitutes.
The Department of Justice and FTC Merger Guidelines, cont.
2. Measure of Concentration
• 1 firm, with 100 percent market share (a monopoly): HHI = 1002 = 10,000
• 2 firms, each with a 50 percent market share: HHI = 502 + 502 = 5,000
• 4 firms, with market shares of 30 percent, 30 percent, 20 percent, and 20
percent: HHI = 302 + 302 + 202 + 202 = 2,600
• 10 firms, each with market shares of 10 percent: HHI = 10 x (102) = 1,000
The Department of Justice and FTC Merger Guidelines, cont.
3. Merger Standards
• Post-merger HHI below 1,000. These markets are not concentrated, so
mergers in them are not challenged.
• Post-merger HHI between 1,000 and 1,800. These markets are moderately
concentrated.
Mergers that raise the HHI by < 100 probably will not be challenged.
Mergers that raise the HHI by > 100 may be challenged.
• Post-merger HHI above 1,800. These markets are highly concentrated.
Mergers that increase the HHI by less than 50 points will not be challenged.
Mergers that increase the HHI by 50 to 100 points may be challenged.
Mergers that increase the HHI by more than 100 points will be challenged.
Making
Have Google and Microsoft
Connection Violated the Antitrust Laws?
the
The debate over
the government’s
role in promoting
competition
seems certain to
continue.
Does Google’s monopoly power harm consumers?
A natural monopoly
that is not subject to
government
regulation will charge
a price = PM and
produce QM.
If government
regulators want
economic efficiency,
they will set the
regulated price = PE,
and the monopoly
will produce QE.
Unfortunately, PE is
< ATC, and the
monopoly will suffer
a loss, shown by the
shaded rectangle.
Because the
monopoly will not
continue to produce
in the LR if it suffers
a loss, government
regulators set a price
= ATC, which is PR
in the figure.
Government Policy toward Monopoly
Regulating Natural Monopolies
FIGURE 14-7 Regulating a Natural Monopoly
AN INSIDE
LOOK
>> The End of the Cable TV Monopoly?
Competition lowers the price of cable TV and increases economic efficiency.
KEY TERMS
Antitrust laws
Natural monopoly
Collusion
Network externalities
Copyright
Patent
Horizontal merger
Public franchise
Market power
Vertical merger
Monopoly
Assignment to prepare for Ch. 13:
 Pre-read Ch. 13, including:
Review Questions: 3rd ed., p. 452 1.1—1.3; p 454 2.1,
2.3—2.5; (2nd ed., p. 464, 1.1 – 1.3; p. 466, 2.1, 2.3, 2.4
& 2.5; (1st edition: 1-4, 6-8 & 10 on pp. 436-43)
(See next slide for Problems & Applications.)
Assignment to prepare for Ch. 13, cont’d.:
 Problems and Applications: 3rd ed., p. 453 1.10; p 454, 2.6, 2.7; p
455 2.10; p456, 2.17, 2.20; (2nd ed., p. 465, 1.10; p. 466, 2.6, 2.7 &
2.10; p. 467, 2.17; p. 468, 2.19; and:
6. The city is considering auctioning licenses that would allow one or
two vendors to sell ice cream on the local beach.
a.
b.
c.
7.
If the city licenses two vendors, will it receive more in total
license fees than if it sells a license to only one vendor?
Will people who use the beach be better off if the city licenses
two vendors or one vendor?
Suppose the city licenses two vendors but announces that every
year it will sell licenses to two new vendors. The same vendor
may not hold a license more than once every five years. Would
this make any difference to the prices the vendors change?
(1st edition: 1, 2, 3, 4, 11, 15 & 21 on pp. 437-440).
Use game theory to explain why: (a) sometimes an innocent person
will confess to a crime; (b) OPEC members don’t always cooperate;
and (c) countries build stockpiles of nuclear weapons to avoid
nuclear war.