PRINCIPLE OF ECONOMIC
6 EDITION
KARL CASE, RAY FAIR
PRENTICE HALL BUSINESS PUBLISHING
COPY RIGHT 2002
Imperfect Competition and Market Power
•
An imperfectly competitive
industry is an industry in which single firms have some control over
the price of their output.
•
Market power
is the imperfectly competitive firm’s ability to raise price without losing all
demand for its product.
Defining Industry Boundaries
•
The ease with which consumers can
substitute for a product limits the extent to which a monopolist can exercise
market power.
•
The more broadly a market is defined,
the more difficult it becomes to find substitutes.
Pure Monopoly
•
A pure monopoly is an
industry with a single firm that produces a product for which there are no
close substitutes and in which significant barriers to entry prevent other
firms from entering the industry to compete for profits.
Barriers to Entry
•
Things that prevent new firms from
entering and competing in imperfectly competitive industries include:
•
Government franchises,
or firms that become monopolies by virtue of a government directive.
•
Things that prevent new firms from
entering and competing in imperfectly competitive industries include:
•
Patents
or barriers that grant the exclusive use of the patented product or process to
the inventor.
•
Things that prevent new firms from
entering and competing in imperfectly competitive industries include:
•
Economies of scale and other cost
advantages enjoyed by industries that have large
capital requirements. A large initial investment,
or the need to embark in an expensive advertising campaign, deter would-be
entrants to the industry.
•
Things that prevent new firms from
entering and competing in imperfectly competitive industries include:
•
Ownership of a scarce factor of
production:
If production requires a particular input, and one firm owns the entire
supply of that input, that firm will control the industry.
Price: The
Fourth Decision Variable
•
Firms with market power must decide:
1.
how much to produce,
2.
how to produce it,
3.
how much to demand in each input market,
and
4.
what price to charge for their
output.
Price and Output Decisions in Pure Monopoly Markets
•
To analyze monopoly behavior we assume
that:
•
Entry to the market is blocked
•
Firms act to maximize profit
•
The pure monopolist buys in competitive
input markets
•
The monopolistic firm cannot price
discriminate
•
The monopoly faces a known demand curve
•
With one firm in a monopoly market,
there is no distinction between the firm and the industry. In a monopoly, the firm is the industry.
•
The market demand curve is the demand
curve facing the firm, and total quantity supplied in the market is what the
firm decides to produce.
Marginal Revenue Curve Facing a Monopolist
•
For a monopolist, an increase in output
involves not just producing more and selling it, but also reducing the price of
its output to sell it.
•
At every level of output except one
unit, a monopolist’s marginal revenue is below price.
Marginal Revenue and Total Revenue
•
A monopolist’s marginal revenue curve
shows the change in total revenue that results as a firm moves along the
segment of the demand curve that lies exactly above it.
Price and Output Choice for a Profit-Maximizing
Monopolist
•
A profit-maximizing monopolist will
raise output as long as marginal revenue exceeds marginal cost (like any other
firm).
•
The profit-maximizing level of output is
the one at which MR = MC.
The Absence of a Supply Curve in Monopoly
•
A monopoly firm has no supply curve that
is independent of the demand curve for its product.
•
A monopolist sets both price and
quantity, and the amount of output supplied depends on both its marginal cost
curve and the demand curve that it faces.
Price and Output Choices for a Monopolist Suffering
Losses in the Short-Run
•
It is possible for a profit-maximizing
monopolist to suffer short-run losses.
•
If the firm cannot generate enough
revenue to cover total costs, it will go out of business in the long-run.
Perfect Competition and Monopoly Compared
•
In a perfectly competitive industry in
the long-run, price will be equal to long-run average cost. The market supply is the sum of all the
short-run marginal cost curves of the firms in the industry.
•
Relative to a competitively organized
industry, a monopolist restricts output, charges higher prices, and earns
positive profits.
Collusion and Monopoly Compared
•
Collusion
is the act of working with other producers in an effort to limit competition
and increase joint profits.
•
When firms collude, the outcome would be
exactly the same as the outcome of a monopoly in the industry.
The Social Costs of Monopoly
•
Monopoly leads to an inefficient mix of
output.
•
Price is above marginal cost, which
means that the firm is underproducing from society’s point of view.
Government Failure
•
The idea of rent-seeking behavior
introduces the notion of government failure, in which the
government becomes the tool of the rent-seeker, and the allocation of resources
is made even less efficient than before.
Public Choice Theory
•
The idea of government failure is at the
center of public choice theory, which holds that public officials
who set economic policies and regulate the players act in their own
self-interest, just as firms do.
Remedies for Monopoly: Antitrust Policy
•
A trust is an arrangement
in which shareholders of independent firms agree to give up their stock in
exchange for trust certificates that entitle them to a share of the trust’s
common profits. A group of trustees then
operates the trust as a monopoly, controlling output and setting price.
Landmark Antitrust Legislation
•
Congress began to formulate antitrust
legislation in 1887, when it created the Interstate Commerce Commission
(ICC) to oversee and correct abuses in the railroad industry.
•
In 1890, Congress passed the Sherman
Act, which declared every contract or conspiracy to restrain trade
among states or nations illegal; and any attempt at monopoly, successful or
not, a misdemeanor.
•
The rule of reason is a
criterion introduced by the Supreme Court in 1911 to determine whether a
particular action was illegal (“unreasonable”) or legal (“reasonable”) within
the terms of the Sherman Act.
•
The Clayton Act, passed by
Congress in 1914, strengthened the Sherman Act and clarified the rule of
reason. The act outlawed specific
monopolistic behaviors such as tying contracts, price discrimination, and
unlimited mergers.
•
The Federal Trade Commission
(FTC), created by Congress in 1914, was established to investigate the
structure and behavior of firms engaging in interstate commerce, to determine
what constitutes unlawful “unfair” behavior , and to issue cease-and-desist
orders to those found in violation of antitrust law.
The Enforcement of Antitrust Law
•
The Wheeler-Lea Act (1938)
extended the language of the Federal Trade Commission Act to include
“deceptive” as well as “unfair” methods of competition.
•
The Antirust Division (of the
Department of Justice) is one of two federal agencies empowered to act
against those in violation of antitrust laws.
It initiates action against those who violate antitrust laws and decides
which cases to prosecute and against whom to bring criminal charges.
•
The courts are empowered to impose a
number of remedies if they find that antitrust law has been violated.
•
Consent decrees
are formal agreements on remedies between all the parties to an antitrust case
that must be approved by the courts.
Consent decrees can be signed before, during, or after a trial.
Natural Monopoly
•
A natural monopoly is an industry
that realizes such large economies of scale in producing its product that
single-firm production of that good or service is most efficient.
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