Microeconomics: Monopoly and Antitrust Policy

Chapter 15 Overview

• Focuses on the concept of monopoly and related antitrust policies.
• Examines the dynamics of monopolistic markets and government interventions.

Chapter Outline

1. Is Any Firm Ever Really a Monopoly?
2. Where Do Monopolies Come From?
3. How Does a Monopoly Choose Price and Output?
4. Does Monopoly Reduce Economic Efficiency?
5. Price Discrimination: Charging Different Prices for the Same Product
6. Government Policy Toward Monopoly

Monopoly Concepts

• Monopoly Definition: A market structure where a single firm is the sole seller of a good or service with no close substitutes.
• Reasons to Study Monopolies:
  1. Some firms operate as monopolists or near-monopolists.
  2. Firms might collude to act like monopolies.

Monopoly Examples

• USPS as a Monopoly: Control over mailbox delivery, but faces competition from other delivery services and electronic communication.

Origins of Monopolies

• Barriers to Entry: Key reasons include government restrictions, control of key resources, network externalities, and natural monopolies.

Types of Barriers to Entry

1. Government Restrictions:
   • Patents, copyrights, and trademarks: Protect innovation and creativity.
   • Public Franchises: Legal provider status, e.g., utilities.
2. Control of a Key Resource: Historical examples include Alcoa and De Beers.
3. Network Externalities: Product value increases with user base, e.g., social media.
4. Natural Monopoly: Economies of scale make single-provider markets more efficient.

Monopoly Pricing and Output

• Profit Maximization: Monopolies set prices and output where marginal revenue equals marginal cost (MC=MR).
• Long-run Profits: Barriers to entry ensure monopolies can sustain long-run profits.

Economic Efficiency and Monopoly

• Graphical Analysis: Illustrates efficiency losses due to monopoly pricing.
• Efficiency Losses: Reduced consumer surplus and increased producer surplus, but total economic surplus declines.

Price Discrimination

• Concept: Charging different prices for the same product based on consumer segments.
• Conditions for Price Discrimination:
  1. Market power.
  2. Identifiable consumer groups with different willingness to pay.
  3. Prevention of arbitrage.
• Examples: Movie theaters and airlines adjust pricing based on consumer segments.

Antitrust Laws and Government Regulation

• Purpose: To prevent monopolistic practices and promote competition.
• Key U.S. Antitrust Laws:
  • Sherman Act (1890)
  • Clayton Act (1914)
  • Federal Trade Commission Act (1914)
  • Robinson-Patman Act (1936)
• Merger Guidelines: Evaluations based on market definition, concentration measures, and potential efficiency gains.
• Regulating Natural Monopolies: Regulations may set prices to balance efficiency and firm profitability.