Ge273.u10.pp1

1 of 34Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
Chapt

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CHAPTER
14
Monopoly
and
Antitrust Policy
Fernando Quijano
Prepared by:
Until 2008, Time
Warner Cable was
the only provider of
cable TV in
Manhattan;
Time Warner had a
monopoly.

Chapt
CHAPTER
14
Monopoly
and
Antitrust Policy
14.1 Is Any Firm Ever Really a Monopoly?
Define monopoly.
14.2 Where Do Monopolies Come From?
Explain the four main reasons
monopolies arise.
14.3 How Does a Monopoly Choose Price
and Output?
Explain how a monopoly chooses price
and output.
14.4 Does Monopoly Reduce Economic
Efficiency?
Use a graph to illustrate how a
monopoly affects economic efficiency.
14.5 Government Policy toward
Monopoly
Discuss government policies toward
monopoly.
Chapter Outline and
Learning Objectives

Chapt
Monopoly: A firm that is the only seller of a
good or service that does not have
a close substitute.
Is Any Firm Ever Really a Monopoly? Define monopoly.
14.1 LEARNING
OBJECTIVE

Chapt
Is the Xbox 360 a Close
Substitute for the PlayStation 3?
Making
the
Connection
To many gamers, Microsoft’s
Xbox is a better deal than
PlayStation 3.
Define monopoly.
14.1 LEARNING
OBJECTIVE
With consumers apparently
viewing the two systems primarily
as game consoles, the Xbox had
a significant advantage because
it was priced $100 less than the
PS3.
YOUR TURN: Test your understanding by doing related problem 1.7 at the end of
this chapter.

Chapt
1. A government blocks the entry of more than one
firm into a market.
2. One firm has control of a key resource necessary to
produce a good.
3. There are important network externalities in
supplying the good or service.
4. Economies of scale are so large that one firm has a
natural monopoly.
Where Do Monopolies Come From?
To have a monopoly, barriers to entering the market must be
so high that no other firms can enter.
Barriers to entry may be high enough to keep out competing
firms for four main reasons:
monopolies arise.
14.2 LEARNING
OBJECTIVE

Chapt
1. By granting a patent or copyright to an
individual or firm, giving it the exclusive right
to produce a product.
2. By granting a firm a public franchise, making
it the exclusive legal provider of a good or
service.
Entry Blocked by Government Action
In the United States, governments block entry in two
main ways:
monopolies arise.
14.2 LEARNING
OBJECTIVE

Chapt
Entry Blocked by Government Action
Patents and Copyrights
Patent : The exclusive right to a product for a
period of 20 years from the date the
product is invented.
Copyright: A government-granted exclusive right to
produce and sell a creation.
Public Franchises
Public franchise: A government designation that a firm
is the only legal provider of a good or
service.
monopolies arise.
14.2 LEARNING
OBJECTIVE

Chapt
The End of the Christmas
Plant Monopoly
Making
the
Connection
At one time, the Ecke family had a
monopoly on growing poinsettias, but
many new firms entered the industry.
monopolies arise.
14.2 LEARNING
OBJECTIVE
YOUR TURN: Test your understanding by doing related problem 2.9 at the end of
this chapter.
After a university researcher
discovered the technique for
growing poinsettias, new firms
quickly entered the industry,
and the price of poinsettias
plummeted. Soon consumers
could purchase them for as little
as three for $10. At those
prices, the Ecke family’s firm
was unable to earn economic
profits.

Chapt
Control of a Key Resource
Another way for a firm to become a
monopoly is by controlling a key resource.
Network Externalities
Network externalities A situation in
which the usefulness of a product
increases with the number of consumers
who use it.
monopolies arise.
14.2 LEARNING
OBJECTIVE

Chapt
Are Diamond Profits Forever?
The De Beers Diamond Monopoly
Making
the
Connection
De Beers promoted the
sentimental value of diamonds
as a way to maintain its position
in the diamond market.
monopolies arise.
14.2 LEARNING
OBJECTIVE
Whether consumers will pay
attention to brands on diamonds
remains to be seen, although
through 2009, the branding
strategy had helped De Beers
maintain its 40 percent share of
the diamond market.
YOUR TURN: Test your understanding by doing related problem 2.10 at the end
of this chapter.

Chapt
Natural Monopoly
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.
monopolies arise.
14.2 LEARNING
OBJECTIVE

Chapt
FIGURE 14-1
Average Total Cost Curve
for a Natural Monopoly
Natural Monopoly
monopolies arise.
14.2 LEARNING
OBJECTIVE
With a natural monopoly, the
average total cost curve is still
falling when it crosses the demand
curve (point A).
If only one firm is producing electric
power in the market, and it
produces where average cost
intersects the demand curve,
average total cost will equal $0.04
per kilowatt-hour of electricity
produced.
If the market is divided between two
firms, each producing 15 billion
kilowatt-hours, the average cost of
producing electricity rises to $0.06
per kilowatt-hour (point B). In this
case, if one firm expands
production, it can move down the
average total cost curve, lower its
price, and drive the other firm out of
business.

Chapt
Solved Problem 14-2
Is the OpenTable Web Site a Natural Monopoly?
monopolies arise.
14.2 LEARNING
OBJECTIVE
YOUR TURN: For more practice, do related problem 2.11 at the end of this
chapter.
OpenTable is a Web site that allows people to make restaurant
reservations online. At this point, there’s no other technology or
easy solution for making Web reservations.

Chapt
• The good thing: It sells more units of the
product.
• The bad thing: It receives less revenue from
each unit than it would have received at the
higher price.
How Does a Monopoly Choose
Price and Output?
Marginal Revenue Once Again
When a firm cuts the price of a product, one good
thing happens, and one bad thing happens:
Explain how a monopoly chooses
price and output.
14.3 LEARNING
OBJECTIVE

Chapt
Price and Output?
Marginal Revenue Once Again
FIGURE 14-2
Calculating a Monopoly’s
Revenue
price and output.
14.3 LEARNING
OBJECTIVE
Time Warner Cable faces a
downward-sloping demand curve
for subscriptions to basic cable.
To sell more subscriptions, it must
cut the price. When this happens,
it gains revenue from selling more
subscriptions but loses revenue
from selling at a lower price the
subscriptions that it could have
sold at a higher price. The firm’s
marginal revenue is the change in
revenue from selling another
subscription. We can calculate
marginal revenue by subtracting
the revenue lost as a result of a
price cut from the revenue gained.
The table shows that Time
Warner’s marginal revenue is less
than the price for every
subscription sold after the first
subscription. Therefore, Time
Warner’s marginal revenue curve
will be below its demand curve.

Chapt
Price and Output?
Profit Maximization for a Monopolist
FIGURE 14-3
Profit-Maximizing Price and Output for a Monopoly
price and output.
14.3 LEARNING
OBJECTIVE
Panel (a) shows that to maximize profit, Time Warner should
sell subscriptions up to the point where the marginal revenue
from selling the last subscription equals its marginal cost (point
A).
In panel (b), the green box represents Time
Warner’s profits. Time Warner’s profit equals $12 ×
6 = $72.

Chapt
Finding the Profit-Maximizing Price and Output for a Monopolist
Solved Problem 14-3
PRICE QUANTITY
TOTAL
REVENUE
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
TOTAL
COST
MARGINAL COST
(MC = ΔTC/ΔQ)
$17 3 $51 – $56 –
16 4 64 $13 63 $7
15 5 75 11 71 8
14 6 84 9 80 9
13 7 91 7 90 10
12 8 96 5 101 11
Don’t Let This Happen to YOU!
Don’t Assume That Charging a Higher Price Is Always More Profitable for a Monopolist
price and output.
14.3 LEARNING
OBJECTIVE
YOUR TURN: Test your understanding by doing related problems 3.3 , 3.4 and 3.7
at the end of this chapter.

Chapt
FIGURE 14-4
What Happens If a Perfectly Competitive
Industry Becomes a Monopoly?
Does Monopoly Reduce
Economic Efficiency?
Comparing Monopoly and Perfect Competition
monopoly affects economic
efficiency.
14.4 LEARNING
OBJECTIVE
In panel (b), the perfectly competitive
television industry became a monopoly. As a
result, the equilibrium quantity falls, and the
equilibrium price rises.
In panel (a), the market for television sets is
perfectly competitive, and price and quantity
are determined by the intersection of the
demand and supply curves.

Chapt
FIGURE 14-5
The Inefficiency of Monopoly
Measuring the Efficiency Losses from Monopoly
efficiency.
14.4 LEARNING
OBJECTIVE
A monopoly charges a higher price,
PM, and produces a smaller
quantity, QM, than a perfectly
competitive industry, which charges
price PC and produces QC.
The higher price reduces consumer
surplus by the area equal to the
rectangle A and the triangle B.
Some of the reduction in consumer
surplus is captured by the monopoly
as producer surplus, and some
becomes deadweight loss, which is
the area equal to triangles B and C.

Chapt
1. Monopoly causes a reduction in consumer
surplus.
2. Monopoly causes an increase in producer
surplus.
3. Monopoly causes a deadweight loss, which
represents a reduction in economic efficiency.
Measuring the Efficiency Losses from Monopoly
We can summarize the effects of monopoly as follows:
efficiency.
14.4 LEARNING
OBJECTIVE

Chapt
Market power: The ability of a firm to charge a price
greater than marginal cost.
Market Power and Technological Change
The introduction of new products requires
firms to spend funds on research and
development.
Because firms with market power are more
likely to earn economic profits than are
perfectly competitive firms, they are also more
likely to carry out research and development
and introduce new products.
How Large Are the Efficiency Losses Due to Monopoly?
efficiency.
14.4 LEARNING
OBJECTIVE

Chapt
Government Policy toward Monopoly
Antitrust Laws and Antitrust Enforcement
Collusion: An agreement among firms to
charge the same price or
otherwise not to compete.
Antitrust laws: Laws aimed at eliminating
collusion and promoting
competition among firms.
Discuss government policies
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
LAW DATE PURPOSE
Sherman Act 1890 Prohibited “restraint of trade,” including price fixing
and collusion. Also outlawed monopolization.
Clayton Act 1914 Prohibited firms from buying stock in competitors and
from having directors serve on the boards of
competing firms.
Federal Trade
Commission Act
1914 Established the Federal Trade Commission (FTC) to
help administer antitrust laws.
Robinson-Patman Act 1936 Prohibited charging buyers different prices if the result
would reduce competition.
Cellar-Kefauver Act 1950 Toughened restrictions on mergers by prohibiting any
mergers that would reduce competition.
Antitrust Laws and Antitrust Enforcement
Table 14-1
Important U.S. Antitrust Laws
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
Horizontal merger: A merger between firms in
the same industry.
Vertical merger: A merger between firms
at different stages of
production of a good.
Mergers: The Trade-off between Market Power and Efficiency
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
FIGURE 14-6
A Merger That Makes
Consumers Better Off
Mergers: The Trade-off between Market Power and Efficiency
toward monopoly.
14.5 LEARNING
OBJECTIVE
This figure shows the result of
all the firms in a perfectly
competitive industry merging
to form a monopoly.
If the monopoly has lower
costs than the perfectly
competitive firms, as shown
by the marginal cost curve
shifting to MC after the
merger, it is possible that the
price will actually decline from
PC to PMerge and that output will
increase from QC to QMerge
following the merger.

Chapt
1. Market definition
2. Measure of concentration
3. Merger standards
Market Definition
A market consists of all firms making
products that consumers view as
close substitutes.
The Department of Justice and FTC Merger Guidelines
The guidelines have three main parts:
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
• 1 firm, with 100 percent market share (a monopoly):
HHI = 1002
= 10,000
Measure of Concentration
• 2 firms, each with a 50 percent market share:
HHI = 502
+ 502
= 5,000
• 4 firms, with market shares of 30 percent, 30 percent, 20
percent, and 20 percent:
HHI = 302
+ 302
+ 202
+ 202
= 2,600
• 10 firms, each with market shares of 10 percent:
HHI = 10 x (102
) = 1,000
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
• Post-merger HHI below 1,000.
These markets are not concentrated, so mergers in them are not
challenged.
Merger Standards
• Post-merger HHI between 1,000 and 1,800.
These markets are moderately concentrated. Mergers that raise the
HHI by less than 100 probably will not be challenged. Mergers that
raise the HHI by more than 100 may be challenged.
• Post-merger HHI above 1,800.
These markets are highly concentrated. Mergers that increase the HHI
by less than 50 points will not be challenged. Mergers that increase the
HHI by 50 to 100 points may be challenged. Mergers that increase the
HHI by more than 100 points will be challenged.
toward monopoly.
14.5 LEARNING
OBJECTIVE

Chapt
Have Google and Microsoft
Violated the Antitrust Laws?
Making
the
Connection
toward monopoly.
14.5 LEARNING
OBJECTIVE
Does Google’s monopoly power harm consumers?
The debate over the
government’s role in
promoting competition
seems certain to
continue.
YOUR TURN: Test your understanding by doing related problems 5.6 and 5.15 at
the end of this chapter.

Chapt
FIGURE 14-7
Regulating a Natural
Monopoly
Regulating Natural Monopolies
toward monopoly.
14.5 LEARNING
OBJECTIVE
A natural monopoly that is
not subject to government
regulation will charge a price
equal to PM and produce QM.
If government regulators
want to achieve economic
efficiency, they will set the
regulated price equal to PE,
and the monopoly will
produce QE.
Unfortunately, PE is below
average cost, and the
monopoly will suffer a loss,
shown by the shaded
rectangle.
Because the monopoly will
not continue to produce in
the long run if it suffers a
loss, government regulators
set a price equal to average
cost, which is PR in the figure.

Chapt
The End of the Cable TV Monopoly?
AN INSIDE LOOK
>>
Competition lowers the price of cable TV and increases economic efficiency.

Chapt
Antitrust laws
Collusion
Copyright
Horizontal merger
Market power
Monopoly
Natural monopoly
Network externalities
Patent
Public franchise
Vertical merger
KEY TERMS

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