Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 8: Exploring Economics
- Module 23: Monopoly
- Module 24: Oligopoly and Monopolistic Competition
- Module 25: Regulating Market Power
MODULE 23:
MONOPOLY
KEY IDEA:
A monopoly is a market with just one firm that can earn
continual profit if competitors have difficulty entering the
market.
OBJECTIVES:
• To explain the concept of market structure.
• To describe the characteristics of a monopoly.
• To explain the effects of price discrimination.
MARKET STRUCTURE
Market structure
describes the nature
of competition
within a market.
MARKET STRUCTURE
The product market
for a good includes all
those products that
consumers consider to
be close substitutes
for that good.
MARKET STRUCTURE
Imperfect competition
arises when there is not
enough competition
among firms to prevent
individual firms from
raising their price above
the equilibrium level
determined by supply
and demand.
WHAT IS A MONOPOLY?
Market power is the ability
of a firm to change the
market price of a good or
service.
Monopoly is a product
market served by only one
firm.
The one supplier in a
monopoly is called a
monopolist.
WHAT IS A MONOPOLY?
Barriers to entry are
obstacles that prevent
firms from entering
particular markets.
A natural monopoly is a
market in which high
startup costs make it
prohibitively expensive for
more than one firm to
operate.
WHAT IS A MONOPOLY?
The average cost is the total cost of production divided by
the quantity of output.
Economies of scale exist if, in the long run, an increase in
output results in a decrease in average cost.
WHAT IS A MONOPOLY?
The Four Main Sources of Market Power:
• High Start- Up Costs
• Exclusive Access to a Critical Input
• Government Protection
• Unfair Practices
WHAT IS A MONOPOLY?
Threats to a Monopolist:
The major threat is introduction of
competition.
Others include:
• Technological change
• The entry of international firms
• The end of government protection
WHAT DO
MONOPOLISTS DO?
Monopolists as Price Makers
Maximizing Profit (MR=MC)
MONOPOLY:
USING THE GRAPH
Find the output where MR = MC on the graph
for the profit maximizing output.
THE INEFFICIENCY OF
MONOPOLY
A consumer’s reservation price for a product is the
highest price he or she is willing to pay to own one
more unit of the product.
PRICE DISCRIMINATION
Price discrimination is the practice of charging
different customers different prices for the same good.
1. Some customers must have higher reservation prices than
others for the same good.
2. The firm must be able to distinguish between customers with
higher and lower reservation prices.
3. It cannot be possible for customers to resell the good.
4. The firm must have market power. Under perfect
competition, competitors would enter and drive the price down
to the marginal cost of production.
PRICE DISCRIMINATION
Perfect Price Discrimination and Efficiency
Removes the inefficiency in single pricing models.
Price Discrimination in Practice
Examples: Movie ticket prices based on time,
lunch versus dinner specials at restaurants;
golf course prices on weekends versus
weekdays
MONOPLY AND INNOVATION
Innovative new products improve our standard of
living and promote economic growth.
• High profits can support innovation.
• Some profits strengthen barriers to entry.
MODULE 23 REVIEW
What is…
A. Imperfect competition?
B. Market structure?
C. Product market?
D. Monopoly?
E. Monopolist?
F. Market power?
G. Barriers to entry?
H. Natural monopoly?
I. Average cost?
J. Economies of scale?
K. Reservation price?
L. Price discrimination?
MODULE 24:
OLIGOPOLY AND MONOPOLISTIC
COMPETITION
KEY IDEA:
When there are many firms in a market, they can gain market power if they
can differentiate their products. When there are only a few firms in a market,
they might be able to work together to reduce output below the perfectly
competitive level, charge a relatively high price, and raise their profits.
OBJECTIVES:
•To describe what characterizes oligopolies and how they operate.
•To explain why it is difficult for a small number of firms to enforce an
agreement that restricts output.
•To analyze how firms in markets characterized by monopolistic competition
behave with regard to pricing, advertising, product development, and quality
of service.
OLIGOPOLY: A SMALL
NUMBER OF FIRMS
An oligopoly is a market with a small number of firms.
An oligopolist is a firm in an oligopoly industry.
OLIGOPOLY: A SMALL
NUMBER OF FIRMS
Collusion among oligopolists exists as they work together.
A cartel is a group of firms that agree to work together and act
like a monopoly.
MONOPOLISTIC
COMPETITION
In a market characterized by monopolistic competition, many
firms supply similar but not identical goods.
– Differentiated products are goods and services that
differ somewhat from other competitive products.
– Building Brand Loyalty gives customers reasons to buy
a specific firm’s product
– Free Entry means that short run profits draws in new
competition
MONOPOLISTIC
COMPETITION
Monopolistic Competition versus
Perfect Competition and Monopoly
MONOPOLISTIC COMPETITION
Pros
Cons
• offering a wider range of
products
• competition for the service
offered
• profits in the short run for
firm
• higher price than perfectly
competition markets
• Inefficiently low quantity of
output
• profits fall as advertising
budgets rise
MODULE 24 REVIEW
What is…
A. Oligopoly?
B. Oligopolist?
C. Cartel?
D. Monopolistic competition?
E. Highly concentrated?
F. Collusion?
G. Differentiated products?
H. Quotas?
I. Chiseling?
MODULE 25:
REGULATING MARKET POWER
KEY IDEA:
Antitrust regulations are designed to limit the inefficiencies
brought about by imperfectly competitive markets.
OBJECTIVES:
• To analyze the effects of market structure on efficiency.
• To discuss the pros and cons of price controls.
• To explain the purpose of antitrust policy and how it is
enforced.
MARKET STRUCTURE
AND EFFICIENCY
Perfect Competition
Perfect Competition results in the efficient level of production.
Monopoly
Price will be higher and the quantity of output lower with
increased market power.
Monopolistic Competition, Oligopoly, and Efficiency
Non-price competition (advertising and branding) create noncompetitive practices.
DIRECT REGULATION:
PRICE CONTROLS
Price controls are policies by which the government
sets the prices in an industry.
•
•
•
The goal is to bring about efficient quantity of good.
Public utility rates set where MR=MC but many firms would
not operate due to high start-up costs. So, regulated price is
where price equals average total cost.
Difficult to set pricing policy as markets and consumer
preferences change.
ANTITRUST POLICY
Antitrust policy is a set of laws designed to promote
competition in the marketplace.
Anti-trust laws passed to:
• limit non-competitive actions
• limit price-fixing
• prohibit predatory acts
The Enforcement of Antitrust Policy
The Department of Justice and the Federal Trade Commission
regulate some business practices and examine proposed
mergers.
MODULE 25 REVIEW
What is…
A. Price controls?
B. Trust?
C. Tying?
D. Antitrust policy?
E. Interlocking directorates?
F. Predatory acts?