Chapter 23
I. Public Policies toward Monopoly
A. Antitrust laws.
1. Sherman Act – 1840
2. Clayton Act – 1914
B. Regulated Monopoly
1. MC Pricing – Set price equal to Marginal Cost
2. AC Pricing – Set Price equal to Average Cost
C. Public (Government) Ownership
II. Natural Monopoly – Economies of scale exist over the relevant range of output.
III. Concentration Ratios – Measure of Market Dominance
A. Four-Firm concentration ratio – percentage of total industry sales by the four largest
firms.
1. Four Firm ratio fails to measure the distribution of power among leading firms.
80% 20%+20%+20%+20%+5%+5%+5%+5%
80% 50%+10%+10%+10%+10%+10%
B. Herfindahl-Hirshman Index – Sum of the squared market shares of firms; gives largest
weight to firms with large market shares.
1700
20%+20%+20%+20%+5%+5%+5%+5%
3000
50%+10%+10%+10%+10%+10
C. Ratios do not show actual market performance or level of competition among firms.
IV. Mergers
A. Horizontal Mergers – Direct Competitors Merge (Starbucks buys Dunkin Donuts)
B. Vertical Merger – Firms that are different steps in the same production process merge.
(Starbucks buys a coffee plantation)
C. Conglomerate Merger – Two firms with no connection merge. (McDonald’s buys a
Tennis Shoe producer)