Monopoly

1
Monopoly

• No, not the boardgame
• ECN101
• Professor Grob

2
Characteristics of a pure monopoly

• Only supplier in the market
• No close substitute
• No real threat of competition

3
Natural monopolies capture economies of scale
Hypothetical electric utility's cost curve
B
A
ATC
4
A monopolist faces a downward sloping demand and
marginal revenue curve
Demand and revenue schedules for a monopolist

Quantity Price Total Marginal (dollars) Revenue
Revenue 0 4,000 0 0 1 3,600 3,600 3,600 2 3,20
0 6,400 2,800 3 2,800 8,400 2,000 4 2,400 9,600
1,200 5 2,000 10,000 400 6 1,600 9,600 -400
Demand Price
MR
5
A monopolist is a price MAKER
DEMAND PRICE
MR
6
A monopoly maximizes profits by selling output
where MRMC and setting price high.
MC
ATC
DEMAND PRICE
MR
7
A monopoly maximizes profits by selling output
where MRMC and setting price high.
MC
ATC
DEMAND PRICE
MR
8
Profit maximization and loss minimization for a
monopolist
Profit maximization
Loss minimization


Losses 1,600
Profits 3,200
MC
MC
A
ATC
A
B
ATC
AVC
C
B
Demand Price
Demand Price
MR
MR
9
The case for and against monopolies

• AGAINST
• Prices high
• Quantity low
• Profits abnormally high
• Poor service
• Promotes inequality
• Wastes resources
• Discourages other entreprenuers

• FOR
• Can often produce more for lower price
• Can invest in more RD and take a long view
• Need to reward innovators with patents

10
Antitrust laws

• Sherman Act of 1890
• Outlawed contracts in restraint of trade
• Attempts to monopolize are a misdemeanor
• Clayton Act of 1914
• Outlawed certain kinds of price discrimination,
  mergers, exclusive supplier contracts
• Also prohibited interlocking directorates among
  competiting firms

11
Antitrust policy

• The Sherman Act is enforced by the Justice
  Department
• The Clayton Act is enforced by the Federal Trade
  Commission
• Most are settled by agreement
• Many organizations have exemptions

12
Historic Cases

• American Tobacco, 1911
• Standard Oil, 1911
• U.S. Steel, 1920
• IBM, 1982
• ATT , 1983
• Microsoft, 1994
• Microsoft, 1998

13
Who wins the price fixing lawsuits?

• Music industry and fixing prices of CDs music
  companies settled and agreed to distribute cash
  to States, nonprofits and to promote music
  programs.
• American Airlines vs. Vanguard in KC/Dallas-Ft.
  Worth Justice Department was unable to show
  American lowered prices below AVC and tried to
  recoup losses by raising prices later.

14
Methods of improving market performance

• Anti-trust
• Economic regulation federal government controls
  prices, wages, conditions of entry, standards.
  Often when there is a public interest or natural
  monopoly.
• Deregulation encourage price competition,
  provide incentives