Chapter 15 Monopoly and Antitrust Policy Few firms are monopolies Monopoly provides a benchmark for the other extreme o Where a firm is the only one in its market o Faces no competition from other firms supplying its product o Useful in analyzing situations in which firms agree to not compete Monopoly a firm that is the only seller of a good or service that does not have a close substitute Where do monopolies come from Barriers to enter the market must be so high that no other firms can enter Government blocks the entry of more than one firm into a market Granting a patent or copyright Granting a firm a public franchise Patent the exclusive right to a product for a period of 20 years from the date the patent is filed with the government Copyright a government granted exclusive right to produce and sell a creation Public franchise a government designation that a firm is the only legal provider of a good or service One firm has control of a key resource necessary to produce a good o Happens infrequently o Most resources are widely available from a variety of suppliers There are important network externalities in supplying the good or service o Virtuous cycle if a firm can attract enough customers initially it can attract additional customers because the value of its product has been increased by more people using it which attracts even more customers Network externalities a situation in which the usefulness of a product increases with the number of consumers who use it Economies of scale are so large that one firm ahs a natural monopoly o Room for only one firm o Exists where fixed costs are very large relative to variable costs 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 A monopoly maximizes profit by producing where marginal revenue equals marginal costs MR MC profit maximizing quantity A monopoly s demand curve is the same as the demand curve for the product Price makers if they raise their prices they will lose some but not all of their customers Downward sloping demand curve and a downward sloping marginal revenue curve Receives less revenue from each unit than it would have received at the Sells more units of product higher price MC MR firm should sell additional because adding to profits New firms will not enter the market when firms are a monopoly because they will not face competition form other firms A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good Effects of monopoly Causes a reduction in consumer surplus Causes an increase in producer surplus Causes a deadweight loss reduction in economic efficiency Market power the ability of a firm to charge a price greater than marginal cost Closer price is to marginal cost the smaller the size of the deadweight lost Collusion an agreement among firms to charge the same price or otherwise not to compete antitrust laws Antitrust laws laws aimed at eliminating collusion and promoting competition among firms Horizontal mergers a merger between firms in the same industry More likely to increase market power Vertical mergers a merger between firms at different stages of production of a good Regulating natural monopolies Most regulators will set price equal where demand intersects the ATC curve