Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
Monopoly and Antitrust
Policy
1
IHSS1200 10.1
2
Monopoly
• Monopoly: a firm that is the only seller of a good or service.
• The monopoly produces a good or service that has no close substitute.
• The monopoly is capable of preserving positive economic profit over the
long-run because competition from other firms is absent.
• The monopoly market is characterized by significant barriers to entry.
1) Government action
2) Control of a key resource
3) Network externalities
4) Economies of scale
3
Government Action To Block Entry
• Patent: grants the exclusive right to produce a product for a period of 20 years
from the date the patent is filed with the government
• During the period of patent protection, the firm can earn high economic profit.
• Once the patent expires, economic profit will be reduced by competition from new
firms.
• Copyright: grants the exclusive right to produce and sell a creation during the
entire lifetime of the creator, and for the creator's heirs for 70 years after the
creator's death.
• Government provides protection to producers for the purpose of encouraging
research, development, and artistic creation.
• Research & Development is an extremely costly process. Patents subsidizes R&D.
4
Control Over A Key Resource
• When one firm controls a key resource needed for production, then a
monopoly can exit.
• This barrier to entry is rare because many key resources, such as oil, are
widely available.
• Examples of key resources that are or have been controlled by one firm
include diamonds, bauxite, nickel, and sports stadiums.
5
IHSS1200 10.2
6
Network Externalities
• Network externalities: the situation where the usefulness of a product
increases as more and more consumers use the product.
• Consumers may become reliant on the product.
• The presence of network externalities acts as a barrier to the entry of new
firms because consumers are already dependent upon the original product.
• Examples: MS-DOS, Windows operating system for computers, eBay
7
Economies of Scale
• Economies of scale: the situation where an increase in output leads to a
decrease in long-run average total cost (or economies of scale).
• Natural monopoly: the situation in which economies of scale mean that one
firm can supply the entire market at lower total average cost than can two or
more firms.
• Natural monopolies are prevalent in industries that involve large fixed costs,
small variable costs, and small marginal costs of production.
• Firms that supply electricity; large fixed costs, lower variable cost after established.
8
Economies of Scale - ATC
9
IHSS1200 10.3
10
Price and Marginal Revenue in the Monopoly Market
• Demand faced by the monopoly is the entire market demand, which means
that the monopoly is subject to the Law of Demand.
• This is opposed to firms in perfect competition subject to a horizontal demand curve.
• For the monopoly average revenue is equal to price, as was true also for the
competitive firm.
• Beyond the first unit of output sold, marginal revenue is less than price.
• Due to the fact that a price change applies not only to the last unit sold, but to all units
currently sold.
11
Marginal Revenue
12
MR vs. Price
13
IHSS1200 10.4
14
Production and Pricing in the Monopoly Market
• The monopoly's profit-maximizing level of output occurs where marginal
revenue is equal to marginal cost of production. Price at the profit maximizing
level of output is given by the demand curve.
• Profit can be measured using: Profit = (P-ATC)*ATC or
Profit = TR- TC
• Even though the firm is earning a positive economic profit, there will not be
entry of new firms due to the barriers to entry.
• Market power: the ability of a firm to charge a price greater than marginal cos