Chapter
9
Monopoly and
Antitrust Policy
Prepared by:
Fernando & Yvonn Quijano
© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e.
Learning Objective 9.2
Where Do Monopolies Come From?
Entry Blocked by Government Action
Chapter 9: Monopoly and Antitrust Policy
In the United States, government blocks entry in two
main ways:
1 By granting a patent or copyright to an
individual or firm, giving it the exclusive right to
produce a product.
2 By granting a firm a public franchise, making it
the exclusive legal provider of a good or
service.
© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e.
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Learning Objective 9.2
Where Do Monopolies Come From?
Entry Blocked by Government Action
Chapter 9: Monopoly and Antitrust Policy
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.
Public Franchises
Public franchise A designation by the
government that a firm is the only legal provider
of a good or service.
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Learning Objective 9.2
Where Do Monopolies Come From?
Chapter 9: Monopoly and Antitrust Policy
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.
© 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e.
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Learning Objective 9.2
Where Do Monopolies Come From?
Natural Monopoly
FIGURE 9-1
Chapter 9: Monopoly and Antitrust Policy
Average Total Cost Curve
for a Natural Monopoly
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Learning Objective 9.5
Government Policy toward Monopoly
Regulating Natural Monopolies
1. (Euro) Setting Price = MC (Competitive Solution) or
2. (US) Setting Price = ATC (Rate-of-Return
Chapter 9: Monopoly and Antitrust Policy
Regulating a Natural Monopoly
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What are the options for pricing with a Natural
Monopoly?
1. Set Price = MC
1. Advantages
Chapter 9: Monopoly and Antitrust Policy
1.
2.
Perfectly Competitive Market Solution
No Deadweight Loss
2. Disadvantages
1.
2.
MC < ATC (Since ATC is still falling)
Firm won’t be able to survive (can’t cover costs)
1.
Will need to subsidize firm with taxes
1. Taxes created Deadweight Losses in other (taxed) markets
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What are the options for pricing with a Natural
Monopoly?
1. Set Price = ATC
1. Advantages
1.
Firm can cover costs of production
Chapter 9: Monopoly and Antitrust Policy
1.
No need for subsidies and no tax distortions in other (taxed)
markets
2. Disadvantages
1.
Deadweight Loss
1.
2.
2.
Creates incentives for the regulated firm to not efficiently
manage their costs as they can pass it on to consumers
(Averech-Johnson effect)
1.
3.
Since Consumer’s MV > Supplier’s MC
But “it’s less” Deadweight Loss than in an unregulated (monopoly)
market
Nicer/larger offices, higher salaries, newer equipment
No incentive to reduce costs through technological innovation
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Price Caps
Chapter 9: Monopoly and Antitrust Policy
Rate-of-Return Regulation
1. Requires the “regulated” company to submit cost data,
demand models/forecasts and rate proposals to the
UTC/PUC any time they “want” to change rates
Price Caps
1. Rates initially established by ROR (see above)
2. Rate changes are allowed within an interval
- New Rate = ROR_rate + inflation – average
productivity for the industry
- Incentive for efficient cost management
- beat the industry average -> higher profit
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