Click to edit Master title style and for two-line headings,Click to edit Master text styles,*,2006 Prentice Hall Business Publishing Economics R.Glenn Hubbard,Anthony Patrick OBrien1,st,ed.,CHAPTER 14:Monopoly and Antitrust Policy,Monopoly and Antitrust Policy,In this chapter,we will develop an economic model of monopolies that can help us to analyze their effects on the economy.,After studying this chapter,you should be able to:,Define monopoly.,Explain the four main reasons monopolies arise.,Explain how a monopoly chooses price and output.,Use a graph to illustrate how monopoly affects economic surplus.,Discuss government policies toward monopoly.,Time Warner Rules Manhattan,LEARNING OBJECTIVES,1,2,3,4,5,2,Where Do Monopolies Come From?,LEARNING OBJECTIVE,2,Barriers to entry,may be high enough to keep out competing firms for four main reasons:,Government blocks the entry of more than one firm into a market.,One firm has control of a key raw material necessary to produce a good.,There are important,network externalities,in supplying the good or service.,Economies of scale are so large that one firm has a,natural monopoly,.,5,Where Do Monopolies Come From?,Entry Blocked by Government Action,By granting a,patent,or,copyright,to an individual or firm,which gives it the exclusive right to produce a product.,By granting a firm a,public franchise,which makes it the exclusive legal provider of a good or service.,6,The End of the Christmas Plant Monopoly,14-2,At one time,the Ecke family had a monopoly on growing poinsettias,but many new firms entered the industry.,7,Where Do Monopolies Come From?,PATENTS AND COPYRIGHTS,Patent,The exclusive right to a product for a period of 20 years from the date the product was invented.,Copyright,The legal right of the creator of a book,film,or piece of music to exclusive right to the creation.,PUBLIC FRANCHISES,Public franchise,A designation by the government that a firm is the only legal provider of a good or service.,CONTROL OF A KEY RESOURCE,Another way for a firm to become a monopoly is by controlling a key resource.This happens infrequently because most resources are widely available from a variety of suppliers.,8,Are Diamond(Profits)Forever?The De Beers Diamond Monopoly,14-3,DeBeers promoted the sentimental value of diamonds as a way to maintain its position in the diamond market.,9,Where Do Monopolies Come From?,Network Externalities,Network externalities,Exist when the usefulness of a product increases with the number of consumers who use it.,10,Where Do Monopolies Come From?,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.,14-1,Average Total Cost Curve for a Natural Monopoly,11,Is the“Proxy Business”a Natural Monopoly?,14-1,LEARNING OBJECTIVE,2,12,How Does a Monopoly Choose Price and Output?,LEARNING OBJECTIVE,3,Marginal Revenue Once Again,Remember that when a firm cuts the price of a product,one good thing 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.,13,How Does a Monopoly Choose Price and Output?,Marginal Revenue Once Again,14-2,Calculating a Monopolys Revenue,14,How Does a Monopoly Choose Price and Output?,Profit Maximization For a Monopolist,14-3,Profit-Maximizing Price and Output for a Monopoly,15,Finding Profit Maximizing Price and Output for a Monopolist,14-2,LEARNING OBJECTIVE,3,PRICE,QUANTITY,TOTAL REVENUE,MARGINAL REVENUE,(,MR,=,TR,/,Q,),TOTAL COST,MARGINALCOST,(,MC,=,TC,/,Q,),$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,Dont Assume That Charging a Higher Price Is Always More Profitable For a Monopolist,16,Does Monopoly Reduce Economic Efficiency?,LEARNING OBJECTIVE,4,Comparing Monopoly and Competition,14-4,What Happens If a Perfectly Competitive Industry Becomes a Monopoly?,17,Does Monopoly Reduce Economic Efficiency?,Measuring the Efficiency Losses from Monopoly,14-5,The Inefficiency of Monopoly,We can summarize the effects of monopoly as follows:,Monopoly causes a reduction in consumer surplus.,Monopoly causes an increase in producer surplus.,Monopoly causes a deadweight loss,which represents a reduction in economic efficiency.,18,Does Monopoly Reduce 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,they are also more likely to introduce new products.,19,Government Policy toward Monopoly,LEARNING OBJECTIVE,5,Collusion,An agreement among firms to charge the same price,or to otherwise not compete.,Antitrust Laws and Antitrust Enf