Académique Documents
Professionnel Documents
Culture Documents
12th Edition
By
Mark Hirschey
Monopoly and Monopsony
Chapter 12
Chapter 12
OVERVIEW
Monopoly Market Characteristics
Profit Maximization in Monopoly Markets
Social Costs of Monopoly
Social Benefits of Monopoly
Monopoly Regulation
Monopsony
Antitrust Policy
Competitive Strategy in Monopoly Markets
Chapter 12
KEY CONCEPTS
monopoly patents
price makers regulatory lag
monopoly oligopsony
underproduction monopsony
deadweight loss from monopsony power
monopoly problem bilateral monopoly
wealth transfer antitrust laws
problem
market niche
natural monopoly
Monopoly Market Characteristics
Basic Features
A single seller.
Unique product.
Blockaded entry and/or exit.
Imperfect dissemination of information.
Opportunity for long-run economic profits.
Examples of Monopoly
Classic examples include electricity utilities, gas and
sanitary services.
OPEC and the NCAA are popular recent examples.
Profit Maximization in Monopoly
Markets
Price/Output Decisions
A monopoly firm is the market.
Market and firm demand curve slope downward.
Role of Marginal Analysis
Set Mπ = MR - MC = 0 to maximize profits; MR=MC at
optimal output.
Because monopoly demand curve is above the
marginal revenue curve, P = AR > MR and P > AC.
Monopoly position allows above-normal profits, π > 0.
Social Costs of Monopoly
Monopoly Underproduction
Monopolists produce too little output.
Monopolists charge prices that are too high, P > MC.
Deadweight Loss from Monopoly
Monopoly markets creates a loss in social welfare
due to the decline in mutually beneficial trade activity.
There is also a wealth transfer problem associated
with monopoly; consumer surplus is transferred to
producer surplus.
Social Benefits of Monopoly
Economies of Scale
In natural monopoly, LRAC declines
continuously and one firm is most efficient.
Some real-world monopolies are government-
created or government-maintained.
Invention and Innovation
Public policy sometimes confers explicit
monopoly rights to spur productivity, e.g.,
patents.
Monopoly Regulation
Dilemma of Natural Monopoly
Monopoly has the potential for efficiency.
Unregulated monopoly can lead to economic
profits and underproduction.
Utility Price and Profit Regulation
Regulation is sometimes used to improve
monopoly market performance.
Substituting bureaucratic decisions for market
interactions is risky and costly.
Monopsony
Buyer Power
Oligopsony describes a handful of buyers.
Monopsony exists if there is only one buyer.
Buyer power can be used to obtain less than
competitive market prices.
Bilateral Monopoly Illustration
Unrestrained monopoly gets higher than competitive
market prices.
Unrestrained monopsony gets lower than competitive
market prices.
Monopoly/monopsony confrontation can breed
compromise.
Antitrust Policy
Overview of Antitrust Law
Market dominance is no offense.
Unfairly gained competitive advantage is illegal.
Sherman and Clayton Acts
Sherman Act forbids restraints of trade and
“monopolizing.”
Clayton Act focuses on mergers, interlocking
directorates, price discrimination, and tying contracts.
Antitrust Enforcement
Department of Justice pursues criminal violations.
FTC litigates civil violations.
Competitive Strategy in Monopoly
Markets
Market Niches
A market niche is a market segment that can be
successfully exploited with special capabilities.
Unique goods and services have the potential to
create durable monopoly profits.
Information Barriers to Competitive Strategy
Published data often measure economic profits only
imperfectly.
Business practices protect trade secrets.