GWU ECON 1011 - Chapter 15: Monopoly and Antitrust Policy

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Chapter 15: Monopoly and Antitrust Policy- Few firms are monopolies- Monopoly provides a benchmark for the other extremeo Where a firm is the only one in its marketo Faces no competition from other firms supplying its producto Useful in analyzing situations in which firms agree to not competeMonopoly: a firm that is the only seller of a good or service that does not have a close substituteWhere 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 franchisePatent: the exclusive right to a product for a period of 20 years from the date the patent is filed with the governmentCopyright: a government granted exclusive right to produce and sell a creationPublic franchise: a government designation that a firm is the only legal provider ofa good or service- One firm has control of a key resource necessary to produce a goodo Happens infrequentlyo Most resources are widely available from a variety of suppliers- There are important network externalities in supplying the good or serviceo 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 customersNetwork 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 monopolyo Room for only one firmo Exists where fixed costs are very large relative to variable costsNatural 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 morefirmsA monopoly maximizes profit by producing where marginal revenue equals marginal costsMR =MC – profit maximizing quantity**A monopoly’s demand curve is the same as the demand curve for the productPrice 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- Sells more units of product- Receives less revenue from each unit than it would have received at the higher priceMC < MR – firm should sell additional because adding to profits** New firms will not enter the market when firms are a monopoly because they willnot face competition form other firms** A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same goodEffects 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 lostCollusion: 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 firmsHorizontal mergers: a merger between firms in the same industry- More likely to increase market powerVertical mergers: a merger between firms at different stages of production of a goodRegulating natural monopolies- Most regulators will set price equal where demand intersects the ATC

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GWU ECON 1011 - Chapter 15: Monopoly and Antitrust Policy

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