chapter12monopolyandantitrustpolicy.ppt

Ch. 12 Monopoly and Antitrust In this chapter we study markets that are controlled by a single firm. Some basics: An imperfectly competitive industry: 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. We define an industry/market with: The ease with which consumers can substitute one product for another. Ease of substitution 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 What are 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. Patents or barriers that grant the exclusive use of the patented product or process to the inventor. 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. 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. Firm Decision-Making: Price is the Fourth Decision Variable Firms with market power must decide: how much to produce how to produce it how much to demand in each input market 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 monopoly faces a known demand curve The monopolistic firm cannot price discriminate Price and Output Decisions in Pure Monopoly Markets With one firm in a monopoly market, there is no distinction betw