Beruflich Dokumente
Kultur Dokumente
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
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13
Monopoly and
Antitrust Policy
Prepared by:
Fernando & Yvonn Quijano
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Monopoly and
Antitrust Policy
13
CHAPTER OUTLINE
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FIGURE 13.2 The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic
Perfectly competitive firms are price-takers; they are small relative to the size of the market
and thus cannot influence market price. The implication is that the demand curve facing a
perfectly competitive firm is perfectly elastic. If the firm raises its price, it sells nothing and
there is no reason for the firm to lower its price if it can sell all it wants at P* = $5.
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(1)
Quantity
0
1
2
3
4
5
6
7
8
9
10
(2)
Price
$11
10
9
8
7
6
5
4
3
2
1
(3)
Total
Revenue
(4)
Marginal
Revenue
0
$10
18
24
28
30
30
28
24
18
10
$10
8
6
4
2
0
-2
-4
-6
-8
13.3ofMarginal
Revenue1 Curve
a Monopolist
At FIGURE
every level
output except
unit, aFacing
monopolists
marginal revenue (MR) is below
price. This is so because (1) we assume that the monopolist must sell all its product at a
single price (no price discrimination) and (2) to raise output and sell it, the firm must
lower the price it charges. Selling the additional output will raise revenue, but this
increase is offset somewhat by the lower price charged for all units sold. Therefore, the
increase in revenue from increasing output by 1 (the marginal revenue) is less than the
price.
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A profit-maximizing
monopolist will raise
output as long as marginal
revenue exceeds marginal
cost. Maximum profit is at
an output of 4,000 units
per period and a price of
$4. Above 4,000 units of
output, marginal cost is
greater than marginal
revenue; increasing output
beyond 4,000 units would
reduce profit. At 4,000
units, TR = PmAQm0, TC =
CBQm0, and profit =
PmABC.
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In a perfectly competitive industry in the long run, price will be equal to long-run average
cost. The market supply curve is the sum of all the short-run marginal cost curves of the
firms in the industry. Here we assume that firms are using a technology that exhibits
constant returns to scale: LRAC is flat. Big firms enjoy no cost advantage.
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FIGURE 13.7 Comparison of Monopoly and Perfectly Competitive Outcomes for a Firm with
Constant Returns to Scale
In the newly organized monopoly, the marginal cost curve is the same as the supply curve
that represented the behavior of all the independent firms when the industry was organized
competitively. Quantity produced by the monopoly will be less than the perfectly competitive
level of output, and the monopoly price will be higher than the price under perfect
competition. Under monopoly, P = Pm = $4 and Q = Qm = 2,500. Under perfect competition, P
= Pc = $3 and Q = Qc = 4,000.
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A natural monopoly is a
firm in which the most
efficient scale is very
large. Here, average total
cost declines until a single
firm is producing nearly
the entire amount
demanded in the market.
With one firm producing
500,000 units, average
total cost is $1 per unit.
With five firms each
producing 100,000 units,
average total cost is $5
per unit.
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Patents
patent A barrier to entry that grants
exclusive use of the patented product
or process to the inventor.
Government Rules
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Network Effects
network externalities The value
of a product to a consumer
increases with the number of that
product being sold or used in the
market.
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Price Discrimination
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Price Discrimination
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The Government
Takes on Whole
Foods
FTC opposing Wild Oats,
Whole Foods merger
The Denver Post
Whole Foods and Wild Oats are each
others closest competitors in premium
natural and organic supermarkets,
and are engaged in intense head-tohead competition in markets across
the country, Jeffrey Schmidt, director
of the FTCs Bureau of Competition,
said in a press release. If Whole
Foods is allowed to devour Wild Oats, it will mean higher prices,
reduced quality, and fewer choices for consumers. That is a deal
consumers should not be allowed to swallow.
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A firm has market power when it exercises some control over the
price of its output or the prices of the inputs that it uses. The
extreme case of a firm with market power is the pure monopolist.
In a pure monopoly, a single firm produces a product for which
there are no close substitutes in an industry in which all new
competitors are barred from entry.
Our focus in this chapter on pure monopoly (which occurs rarely)
has served a number of purposes. First, the monopoly model
describes a number of industries quite well. Second, the
monopoly case illustrates the observation that imperfect
competition leads to an inefficient allocation of resources. Finally,
the analysis of pure monopoly offers insights into the more
commonly encountered market models of monopolistic
competition and oligopoly, which we discussed briefly in this
chapter and will discuss in detail in the next two chapters.
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barrier to entry
Clayton Act
Federal Trade Commission (FTC)
government failure
imperfectly competitive industry
market power
natural monopoly
network externalities
patent
perfect price discrimination
price discrimination
public choice theory
pure monopoly
rent-seeking behavior
rule of reason
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