©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 20 “monopoly and antitrust”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

Chapter 20Chapter 20“Monopoly and Antitrust”“Monopoly and Antitrust”

Chapter 20Chapter 20“Monopoly and Antitrust”“Monopoly and Antitrust”

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Describe how barriers to entry create Describe how barriers to entry create market power.market power.

2.2. Discuss the profit maximization process Discuss the profit maximization process for a monopolist.for a monopolist.

3.3. Explain the inefficiencies of monopoly.Explain the inefficiencies of monopoly.

4.4. Name and briefly discuss major U.S. Name and briefly discuss major U.S. antitrust laws and potentially antitrust laws and potentially punishable practices.punishable practices.

1.1. Describe how barriers to entry create Describe how barriers to entry create market power.market power.

2.2. Discuss the profit maximization process Discuss the profit maximization process for a monopolist.for a monopolist.

3.3. Explain the inefficiencies of monopoly.Explain the inefficiencies of monopoly.

4.4. Name and briefly discuss major U.S. Name and briefly discuss major U.S. antitrust laws and potentially antitrust laws and potentially punishable practices.punishable practices.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

5.5. Identify government policies toward Identify government policies toward monopoly.monopoly.

6.6. Assess the merits of protecting the U.S. Postal Assess the merits of protecting the U.S. Postal Service from competition.Service from competition.

5.5. Identify government policies toward Identify government policies toward monopoly.monopoly.

6.6. Assess the merits of protecting the U.S. Postal Assess the merits of protecting the U.S. Postal Service from competition.Service from competition.


20.120.1SOURCES OF MONOPOLYSOURCES OF MONOPOLY20.120.1SOURCES OF MONOPOLYSOURCES OF MONOPOLY

When one firm supplies the entire market, the When one firm supplies the entire market, the market structure is called a market structure is called a monopoly.monopoly.

A monopoly is characterized by a single firm A monopoly is characterized by a single firm selling an output for which there are no close selling an output for which there are no close substitutes.substitutes.

Monopoly is caused by very high Monopoly is caused by very high barriers to barriers to entry,entry, which exist when investors or which exist when investors or entrepreneurs find obstacles to joining a entrepreneurs find obstacles to joining a profitable industry.profitable industry.

When one firm supplies the entire market, the When one firm supplies the entire market, the market structure is called a market structure is called a monopoly.monopoly.

A monopoly is characterized by a single firm A monopoly is characterized by a single firm selling an output for which there are no close selling an output for which there are no close substitutes.substitutes.

Monopoly is caused by very high Monopoly is caused by very high barriers to barriers to entry,entry, which exist when investors or which exist when investors or entrepreneurs find obstacles to joining a entrepreneurs find obstacles to joining a profitable industry.profitable industry.


Barriers to EntryBarriers to EntryBarriers to EntryBarriers to Entry

Monopoly by law (legal monopoly) –Monopoly by law (legal monopoly) – when one when one firm is protected by law from competition, and firm is protected by law from competition, and there are no close substitutes for the good.there are no close substitutes for the good.Monopoly by possession –Monopoly by possession – when one firm is the when one firm is the only owner of a resource needed to produce a only owner of a resource needed to produce a good, and there are no close substitutes for the good, and there are no close substitutes for the resource or for the good.resource or for the good.Natural monopoly –Natural monopoly – when it is cheaper for one when it is cheaper for one firm to produce the entire industry’s output firm to produce the entire industry’s output than it would be for two or more firms to than it would be for two or more firms to produce the same output. produce the same output.

Monopoly by law (legal monopoly) –Monopoly by law (legal monopoly) – when one when one firm is protected by law from competition, and firm is protected by law from competition, and there are no close substitutes for the good.there are no close substitutes for the good.Monopoly by possession –Monopoly by possession – when one firm is the when one firm is the only owner of a resource needed to produce a only owner of a resource needed to produce a good, and there are no close substitutes for the good, and there are no close substitutes for the resource or for the good.resource or for the good.Natural monopoly –Natural monopoly – when it is cheaper for one when it is cheaper for one firm to produce the entire industry’s output firm to produce the entire industry’s output than it would be for two or more firms to than it would be for two or more firms to produce the same output. produce the same output.


Barriers to EntryBarriers to EntryBarriers to EntryBarriers to Entry

Barriers to entry bring about Barriers to entry bring about market power.market power.This market power reveals itself in the slope of This market power reveals itself in the slope of the firm’s demand curve.the firm’s demand curve.The steeper the demand curve, the more The steeper the demand curve, the more market power the firm has and the greater its market power the firm has and the greater its ability to determine price.ability to determine price.Monopoly represents the most market power, Monopoly represents the most market power, in which case the firm’s demand is identical to in which case the firm’s demand is identical to market demand.market demand.

Barriers to entry bring about Barriers to entry bring about market power.market power.This market power reveals itself in the slope of This market power reveals itself in the slope of the firm’s demand curve.the firm’s demand curve.The steeper the demand curve, the more The steeper the demand curve, the more market power the firm has and the greater its market power the firm has and the greater its ability to determine price.ability to determine price.Monopoly represents the most market power, Monopoly represents the most market power, in which case the firm’s demand is identical to in which case the firm’s demand is identical to market demand.market demand.


The Effect of Increasing The Effect of Increasing Market PowerMarket Power

The Effect of Increasing The Effect of Increasing Market PowerMarket Power

$

Quantity

Demand

Demand facing aprice taker

Demand facingmonopoly, the extreme case ofa price taker.

Increasingmarket power.


Natural MonopolyNatural MonopolyNatural MonopolyNatural Monopoly

• Natural monopolyNatural monopoly occurs when one firm occurs when one firm can supply the entire market at a lower can supply the entire market at a lower price than two or more separate firms.price than two or more separate firms.

• This means that natural monopoly will This means that natural monopoly will occur any time the minimum point on occur any time the minimum point on long-run average cost near or to the right long-run average cost near or to the right of market demand.of market demand.

• Natural monopoly occurs when there are Natural monopoly occurs when there are substantial substantial economies of scale.economies of scale.


Natural MonopolyNatural MonopolyNatural MonopolyNatural Monopoly

Demand

Long-run average cost

Demand

Long-run average cost

Average cost with multiple firms

Lower average cost with one firms

The larger the firm size, the lower the average cost of output

Quantity Quantity

$ $

Long-run average cost Long-run average cost declines throughout the declines throughout the relevant range of output. relevant range of output.

Long-run average cost reaches Long-run average cost reaches its minimum point near demandits minimum point near demand


20.220.2THE PROFIT-MAXIMIZING MONOPOLYTHE PROFIT-MAXIMIZING MONOPOLY

20.220.2THE PROFIT-MAXIMIZING MONOPOLYTHE PROFIT-MAXIMIZING MONOPOLY

o Total revenue is maximized when the elasticity Total revenue is maximized when the elasticity of demand equals one.of demand equals one.o With a straight line demand curve this happens at With a straight line demand curve this happens at

the midpoint.the midpoint.

o Even if production cost were zero, the Even if production cost were zero, the monopoly would not produce any more than monopoly would not produce any more than the revenue-maximizing output, since to do so the revenue-maximizing output, since to do so would lower its total revenue, and thus profit.would lower its total revenue, and thus profit.

o The monopoly firm always chooses to produce The monopoly firm always chooses to produce in the elastic range of demand.in the elastic range of demand.

o Total revenue is maximized when the elasticity Total revenue is maximized when the elasticity of demand equals one.of demand equals one.o With a straight line demand curve this happens at With a straight line demand curve this happens at

the midpoint.the midpoint.

o Even if production cost were zero, the Even if production cost were zero, the monopoly would not produce any more than monopoly would not produce any more than the revenue-maximizing output, since to do so the revenue-maximizing output, since to do so would lower its total revenue, and thus profit.would lower its total revenue, and thus profit.

o The monopoly firm always chooses to produce The monopoly firm always chooses to produce in the elastic range of demand.in the elastic range of demand.


The Profit-Maximizing MonopolyThe Profit-Maximizing MonopolyThe Profit-Maximizing MonopolyThe Profit-Maximizing Monopoly

o The rule of profit maximization is the The rule of profit maximization is the same for a monopoly as for all other same for a monopoly as for all other firms:firms:

o Produce at the point where Produce at the point where marginal marginal revenue equals marginal cost.revenue equals marginal cost.

o MR=MC ruleMR=MC rule


Marginalrevenue

Demand

$$

Quantity


When total revenue ismaximized, marginal revenue is zero.

•

Unit Elastic

•

Monopoly outputis in the elasticrange of demand.

•Total revenue


A downward sloping demand curve is A downward sloping demand curve is associated with a marginal revenue curve associated with a marginal revenue curve that slopes down even more steeply.that slopes down even more steeply.

The result is that the marginal revenue The result is that the marginal revenue from an additional unit of output would from an additional unit of output would equal the price of that unit minus the equal the price of that unit minus the price reduction on every other unit sold.price reduction on every other unit sold.

The monopolist has no unique supply The monopolist has no unique supply curve.curve.

A downward sloping demand curve is A downward sloping demand curve is associated with a marginal revenue curve associated with a marginal revenue curve that slopes down even more steeply.that slopes down even more steeply.

The result is that the marginal revenue The result is that the marginal revenue from an additional unit of output would from an additional unit of output would equal the price of that unit minus the equal the price of that unit minus the price reduction on every other unit sold.price reduction on every other unit sold.

The monopolist has no unique supply The monopolist has no unique supply curve.curve.



Marginal Revenue less than PriceMarginal Revenue less than PriceMarginal Revenue less than PriceMarginal Revenue less than Price

Marginalrevenue

Demand

$$

Quantity

Lower price

Larger quantity

Marginal revenue equals added revenue from one more unit sold...

...minus less revenue from lower price on other units sold.


Demand and RevenueDemand and RevenueDemand and RevenueDemand and Revenue

Price QuantityTotal revenue (price x quantity)

Marginal revenue (change in price/ change in quantity)

$12 0 $0 undefined$11 1 $11 $11$10 2 $20 $9$9 3 $27 $7$8 4 $32 $5

30

25

20

15

10

5

0

0 1 2 3 4

Total revenue

Marginal revenue

Demand

Revenue

QuantityThe data above is plotted. Note that the data confirm that marginal revenue has a steeper slope than demand.


Monopoly Output and PriceMonopoly Output and PriceMonopoly Output and PriceMonopoly Output and Price

Monopoly price

Monopolyoutput

Dol

lars

Quantity

Marginal Cost

Marginal Revenue

Demand

#1 the monopolist sets output to equate marginal revenue and marginal cost

#2 The monopolist charges as much as the market willbear for that output.


Monopoly Output and PriceMonopoly Output and PriceMonopoly Output and PriceMonopoly Output and Price

Monopolyoutput

Dol

lars

Quantity

Marginal Cost

Marginal Revenue

Demand

#1 When elasticity of demand rises….

#2 The monopolist price falls.

Monopoly price

•

•

•


Profit, Breakeven, or LossProfit, Breakeven, or LossProfit, Breakeven, or LossProfit, Breakeven, or Loss

TheThe profit-maximizing quantity graphically, profit-maximizing quantity graphically, for a monopolist occurs at the point where for a monopolist occurs at the point where marginal revenue equals marginal cost.marginal revenue equals marginal cost.

The profit maximizing price is set at the The profit maximizing price is set at the corresponding point on the demand curve.corresponding point on the demand curve.

The average profit per unit sold is multiplied The average profit per unit sold is multiplied by the number of units sold.by the number of units sold.

The average profit per unit is the difference The average profit per unit is the difference between price and average cost at the profit-between price and average cost at the profit-maximizing quantity.maximizing quantity.

TheThe profit-maximizing quantity graphically, profit-maximizing quantity graphically, for a monopolist occurs at the point where for a monopolist occurs at the point where marginal revenue equals marginal cost.marginal revenue equals marginal cost.

The profit maximizing price is set at the The profit maximizing price is set at the corresponding point on the demand curve.corresponding point on the demand curve.

The average profit per unit sold is multiplied The average profit per unit sold is multiplied by the number of units sold.by the number of units sold.

The average profit per unit is the difference The average profit per unit is the difference between price and average cost at the profit-between price and average cost at the profit-maximizing quantity.maximizing quantity.


Profit, Breakeven, or LossProfit, Breakeven, or LossProfit, Breakeven, or LossProfit, Breakeven, or Loss

Price

Profit maximizing output

Dol

lars

QuantityMarginal Revenue

Marginal Cost

Demand

Average Cost

Number of unit

Profit per unit

Profit


Monopoly Breakeven, or LossMonopoly Breakeven, or LossMonopoly Breakeven, or LossMonopoly Breakeven, or Loss

Marginal cost

Average cost

Demand

Marginal revenue

Price

Profit-maximizing output

Quantity

Demand

Quantity

Marginal revenue

Marginal cost

Average cost

Loss-minimizing quantity

Price

Maximum profit is zero profit

Average cost exceeds price

Loss per unit Number

of units


Efficiency and Price Efficiency and Price DiscriminationDiscrimination

Efficiency and Price Efficiency and Price DiscriminationDiscrimination

• Monopoly is Monopoly is allocatively inefficientallocatively inefficient because the because the quantity that equates marginal cost and quantity that equates marginal cost and marginal revenue falls short of the quantity marginal revenue falls short of the quantity that equates marginal cost and demand. that equates marginal cost and demand. – The profit-maximizing quantity is less than The profit-maximizing quantity is less than

the efficient quantity.the efficient quantity.– The area of deadweight loss shows the The area of deadweight loss shows the

benefits that consumers would have received benefits that consumers would have received from the additional output minus the cost from the additional output minus the cost the firm would have incurred to produce it.the firm would have incurred to produce it.

• Monopoly is Monopoly is allocatively inefficientallocatively inefficient because the because the quantity that equates marginal cost and quantity that equates marginal cost and marginal revenue falls short of the quantity marginal revenue falls short of the quantity that equates marginal cost and demand. that equates marginal cost and demand. – The profit-maximizing quantity is less than The profit-maximizing quantity is less than

the efficient quantity.the efficient quantity.– The area of deadweight loss shows the The area of deadweight loss shows the

benefits that consumers would have received benefits that consumers would have received from the additional output minus the cost from the additional output minus the cost the firm would have incurred to produce it.the firm would have incurred to produce it.


Limit PricingLimit PricingLimit PricingLimit Pricing

•In order to avoid the threat of potential competition, In order to avoid the threat of potential competition, a monopolist might practice a monopolist might practice limit pricing.limit pricing.

•This is where the monopolist charges the highest This is where the monopolist charges the highest price customers will pay, subject to the limit that the price customers will pay, subject to the limit that the price not be so high that it attracts potential price not be so high that it attracts potential competitors.competitors.

•The limit price will be lower than the short-run The limit price will be lower than the short-run profit-maximizing price.profit-maximizing price.


The Inefficiency of MonopolyThe Inefficiency of MonopolyThe Inefficiency of MonopolyThe Inefficiency of Monopoly

Monopoly Price

Monopoly Output

Dol

lars

Quantity

Marginal Cost

Demand = marginal benefit

Efficient Output

Average cost

Efficiency forgone:the deadweight lossfrom monopoly.

•

Marginal revenue


Price DiscriminationPrice DiscriminationPrice DiscriminationPrice Discrimination

Price discriminationPrice discrimination is selling a good or service is selling a good or service at different prices to various buyers, when such at different prices to various buyers, when such differences are not justified by cost differences.differences are not justified by cost differences.

Price discrimination is feasible when different Price discrimination is feasible when different prices can be charged to different market prices can be charged to different market segments.segments.

Matching prices exactly to the demand curve is Matching prices exactly to the demand curve is the extreme of the extreme of perfect price discriminationperfect price discrimination



1 2 3 4 5 6 7 8 9 10

$19$18

$17 $16

$15 $14

$13$12

$11$10 •

Marginal cost

Demand = Marginal benefit= Marginal revenue

$

Quantity

The arrows are prices, which differ from customer to customer

Efficient and profit-maximizing output


o Another example of price discrimination is multi-Another example of price discrimination is multi-part pricing.part pricing.

o Multi-part pricingMulti-part pricing depends on the amount depends on the amount consumed.consumed.

o The monopolist sets sets the price high for the first The monopolist sets sets the price high for the first units consumed, since those are the hardest to do units consumed, since those are the hardest to do without. The price for additional units could be without. The price for additional units could be lower.lower.

o Multi-part pricing causes marginal revenue to fall Multi-part pricing causes marginal revenue to fall somewhere between the extremes of the monopolist somewhere between the extremes of the monopolist with a single price, and one able to practice perfect with a single price, and one able to practice perfect price discrimination.price discrimination.

o Another example of price discrimination is multi-Another example of price discrimination is multi-part pricing.part pricing.

o Multi-part pricingMulti-part pricing depends on the amount depends on the amount consumed.consumed.

o The monopolist sets sets the price high for the first The monopolist sets sets the price high for the first units consumed, since those are the hardest to do units consumed, since those are the hardest to do without. The price for additional units could be without. The price for additional units could be lower.lower.

o Multi-part pricing causes marginal revenue to fall Multi-part pricing causes marginal revenue to fall somewhere between the extremes of the monopolist somewhere between the extremes of the monopolist with a single price, and one able to practice perfect with a single price, and one able to practice perfect price discrimination.price discrimination.



20.320.3ANTITRUST POLICYANTITRUST POLICY20.320.3ANTITRUST POLICYANTITRUST POLICY

Antitrust lawAntitrust law is a body of public policies is a body of public policies designed to limit the abuse of market power, designed to limit the abuse of market power, and is enforced by the justice department.and is enforced by the justice department.

The antitrust laws neither make monopoly The antitrust laws neither make monopoly illegal nor apply only to monopoly.illegal nor apply only to monopoly.

Antitrust laws are intended to curb abuses of Antitrust laws are intended to curb abuses of market power, of which monopolist have the market power, of which monopolist have the most.most.

Antitrust lawAntitrust law is a body of public policies is a body of public policies designed to limit the abuse of market power, designed to limit the abuse of market power, and is enforced by the justice department.and is enforced by the justice department.

The antitrust laws neither make monopoly The antitrust laws neither make monopoly illegal nor apply only to monopoly.illegal nor apply only to monopoly.

Antitrust laws are intended to curb abuses of Antitrust laws are intended to curb abuses of market power, of which monopolist have the market power, of which monopolist have the most.most.


Examples of Antitrust LegislationExamples of Antitrust LegislationExamples of Antitrust LegislationExamples of Antitrust Legislation

Sherman Act (1890)Sherman Act (1890)

Federal Trade Commission Act (1914)Federal Trade Commission Act (1914)

Clayton Act (1914)Clayton Act (1914)

Robinson-Patman Act (1936)Robinson-Patman Act (1936)

Celler-Kefauver Antimerger Act (1950)Celler-Kefauver Antimerger Act (1950)


Antitrust PolicyAntitrust PolicyAntitrust PolicyAntitrust Policy

Exclusive dealing:

A firm prohibits its distributors from selling competitors’ products.

A firm assigns a geographic area to a distributor and prohibits other distributors from operating in that territory.A firm prices a product below the marginal cost of producing it to drive rivals out of business.

A firm charges different customers different prices for the same product.

Exclusive territories:

Predatory pricing:

Price discrimination:

GLOSSARY OF TERMS


Antitrust PolicyAntitrust PolicyAntitrust PolicyAntitrust Policy

A firm prohibits rivals from purchasing/using scarce resources (called essential facilities) that are needed to stay in business.

Refusals to deal:

Resale price maintenance:

Tie-in sales:

A manufacturer sets a minimum retail price for its product.

A firm conditions the purchase of one product upon the purchase of another.

GLOSSARY OF TERMS


Alternatives to RegulationAlternatives to RegulationAlternatives to RegulationAlternatives to Regulation

If a monopoly is a natural monopoly the If a monopoly is a natural monopoly the government will typically either own it or government will typically either own it or regulate it with regulate it with rate-of-return regulationrate-of-return regulation that that restrict the monopolist from charging more restrict the monopolist from charging more than average cost.than average cost.

Rate-of-return pricing is also known as Rate-of-return pricing is also known as average average cost pricing.cost pricing.

To avoid the inefficiencies of regulation, To avoid the inefficiencies of regulation, economist recommend alternatives like economist recommend alternatives like franchise monopoly,franchise monopoly, which is a right to be the which is a right to be the exclusive provider of a service.exclusive provider of a service.

If a monopoly is a natural monopoly the If a monopoly is a natural monopoly the government will typically either own it or government will typically either own it or regulate it with regulate it with rate-of-return regulationrate-of-return regulation that that restrict the monopolist from charging more restrict the monopolist from charging more than average cost.than average cost.

Rate-of-return pricing is also known as Rate-of-return pricing is also known as average average cost pricing.cost pricing.

To avoid the inefficiencies of regulation, To avoid the inefficiencies of regulation, economist recommend alternatives like economist recommend alternatives like franchise monopoly,franchise monopoly, which is a right to be the which is a right to be the exclusive provider of a service.exclusive provider of a service.


o The government has allowed The government has allowed deregulation in some industries.deregulation in some industries.

o DeregulationDeregulation is the scaling back of is the scaling back of government regulation of industry.government regulation of industry.

o The reduction of government ownership The reduction of government ownership of industries is referred to as of industries is referred to as privatization.privatization.

o The government has allowed The government has allowed deregulation in some industries.deregulation in some industries.

o DeregulationDeregulation is the scaling back of is the scaling back of government regulation of industry.government regulation of industry.

o The reduction of government ownership The reduction of government ownership of industries is referred to as of industries is referred to as privatization.privatization.

Alternatives to RegulationAlternatives to RegulationAlternatives to RegulationAlternatives to Regulation


20.4 EXPLORE & APPLY20.4 EXPLORE & APPLYThe U.S. Postal Service A Monopoly in the The U.S. Postal Service A Monopoly in the Public InterestPublic Interest

20.4 EXPLORE & APPLY20.4 EXPLORE & APPLYThe U.S. Postal Service A Monopoly in the The U.S. Postal Service A Monopoly in the Public InterestPublic InterestThe U.S. Post Office is the oldest monopoly in The U.S. Post Office is the oldest monopoly in

the U.S.the U.S.It is intended to be self supporting.It is intended to be self supporting.In 2001, it had 776,000 employees, and earned $65.9 In 2001, it had 776,000 employees, and earned $65.9

billion in revenues.billion in revenues.It expenses however were $67.6 billion, and as a It expenses however were $67.6 billion, and as a

result lost $1.68 billion dollars.result lost $1.68 billion dollars.To try to make up for the losses it hired FedEx To try to make up for the losses it hired FedEx

to handle its overnight deliveries, and increased to handle its overnight deliveries, and increased the basic rate for mailing a letter to 37the basic rate for mailing a letter to 37 cents. cents.

The U.S. Post Office is the oldest monopoly in The U.S. Post Office is the oldest monopoly in the U.S.the U.S.It is intended to be self supporting.It is intended to be self supporting.In 2001, it had 776,000 employees, and earned $65.9 In 2001, it had 776,000 employees, and earned $65.9

billion in revenues.billion in revenues.It expenses however were $67.6 billion, and as a It expenses however were $67.6 billion, and as a

result lost $1.68 billion dollars.result lost $1.68 billion dollars.To try to make up for the losses it hired FedEx To try to make up for the losses it hired FedEx

to handle its overnight deliveries, and increased to handle its overnight deliveries, and increased the basic rate for mailing a letter to 37the basic rate for mailing a letter to 37 cents. cents.


The U.S. Postal Service A The U.S. Postal Service A Monopoly in the Public InterestMonopoly in the Public Interest

The U.S. Postal Service A The U.S. Postal Service A Monopoly in the Public InterestMonopoly in the Public Interest

Other cost cutting measure include:Other cost cutting measure include:Possibly eliminating Saturday deliveries.Possibly eliminating Saturday deliveries.Installing new automated equipment.Installing new automated equipment.PrivatizationPrivatization

Additional challenges include:Additional challenges include:The growing popularity of email.The growing popularity of email.The cost of protecting employees and The cost of protecting employees and

customers from the threat of anthrax.customers from the threat of anthrax.

Other cost cutting measure include:Other cost cutting measure include:Possibly eliminating Saturday deliveries.Possibly eliminating Saturday deliveries.Installing new automated equipment.Installing new automated equipment.PrivatizationPrivatization

Additional challenges include:Additional challenges include:The growing popularity of email.The growing popularity of email.The cost of protecting employees and The cost of protecting employees and

customers from the threat of anthrax.customers from the threat of anthrax.


Terms Along the WayTerms Along the WayTerms Along the WayTerms Along the Way

o monopolymonopolyo barriers to entrybarriers to entryo monopoly by lawmonopoly by lawo monopoly by monopoly by

possessionpossessiono natural monopolynatural monopolyo price makerprice makero limit pricinglimit pricing

o monopolymonopolyo barriers to entrybarriers to entryo monopoly by lawmonopoly by lawo monopoly by monopoly by

possessionpossessiono natural monopolynatural monopolyo price makerprice makero limit pricinglimit pricing

o price discriminationprice discriminationo perfect price perfect price

discriminationdiscriminationo Multi-part pricingMulti-part pricingo antitrust lawantitrust lawo rate of return rate of return

regulationregulationo average price pricingaverage price pricing

o price discriminationprice discriminationo perfect price perfect price

discriminationdiscriminationo Multi-part pricingMulti-part pricingo antitrust lawantitrust lawo rate of return rate of return

regulationregulationo average price pricingaverage price pricing


Terms Along the Way (continued)Terms Along the Way (continued)Terms Along the Way (continued)Terms Along the Way (continued)

o franchising franchising monopolymonopoly

o deregulationderegulationo privatizationprivatization

o franchising franchising monopolymonopoly

o deregulationderegulationo privatizationprivatization


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. Barriers to entry Barriers to entry

a.a. increase the number of firms in an industry.increase the number of firms in an industry.

b.b. decrease the number of firms in an industry.decrease the number of firms in an industry.

c.c. have no effect on the number of firms in an have no effect on the number of firms in an industry.industry.

d.d. have unpredictable effects on the number of have unpredictable effects on the number of firms in an industry.firms in an industry.

1.1. Barriers to entry Barriers to entry

a.a. increase the number of firms in an industry.increase the number of firms in an industry.

b.b. decrease the number of firms in an industry.decrease the number of firms in an industry.

c.c. have no effect on the number of firms in an have no effect on the number of firms in an industry.industry.

d.d. have unpredictable effects on the number of have unpredictable effects on the number of firms in an industry.firms in an industry.



2.2. Market power is indicated by a(n) Market power is indicated by a(n)

a.a. horizontal demand curve.horizontal demand curve.

b.b. shortage of barriers to entry.shortage of barriers to entry.

c.c. ability to pick your selling price.ability to pick your selling price.

d. j shape to the marginal cost curve.shape to the marginal cost curve.

2.2. Market power is indicated by a(n) Market power is indicated by a(n)

a.a. horizontal demand curve.horizontal demand curve.

b.b. shortage of barriers to entry.shortage of barriers to entry.

c.c. ability to pick your selling price.ability to pick your selling price.

d. j shape to the marginal cost curve.shape to the marginal cost curve.



3.3. Which statement is true about monopoly?Which statement is true about monopoly?

a.a. A monopoly is a price taker.A monopoly is a price taker.

b.b. A monopoly will have many good substitutes A monopoly will have many good substitutes for its output.for its output.

c.c. The monopoly demand curve is also the The monopoly demand curve is also the market demand curve.market demand curve.

d.d. An unregulated monopoly is always An unregulated monopoly is always profitable.profitable.

3.3. Which statement is true about monopoly?Which statement is true about monopoly?

a.a. A monopoly is a price taker.A monopoly is a price taker.

b.b. A monopoly will have many good substitutes A monopoly will have many good substitutes for its output.for its output.

c.c. The monopoly demand curve is also the The monopoly demand curve is also the market demand curve.market demand curve.

d.d. An unregulated monopoly is always An unregulated monopoly is always profitable.profitable.



4.4. A natural monopoly occurs when A natural monopoly occurs when a.a. government grants a patent to a firm.government grants a patent to a firm.b.b. government prohibits the entry of new government prohibits the entry of new

competitor firms.competitor firms.c.c. one firm can produce at lower average one firm can produce at lower average

cost than any combination of two or cost than any combination of two or more firms.more firms.

d.d. the product that is monopolized the product that is monopolized pertains to natural resources.pertains to natural resources.

4.4. A natural monopoly occurs when A natural monopoly occurs when a.a. government grants a patent to a firm.government grants a patent to a firm.b.b. government prohibits the entry of new government prohibits the entry of new

competitor firms.competitor firms.c.c. one firm can produce at lower average one firm can produce at lower average

cost than any combination of two or cost than any combination of two or more firms.more firms.

d.d. the product that is monopolized the product that is monopolized pertains to natural resources.pertains to natural resources.



5.5. A marginal revenue curve for a A marginal revenue curve for a monopoly willmonopoly will

a.a. be shaped like the letter be shaped like the letter JJ..

b.b. lie below the demand curve.lie below the demand curve.

c.c. lie above the demand curve.lie above the demand curve.

d.d. be identical to the demand curve.be identical to the demand curve.

5.5. A marginal revenue curve for a A marginal revenue curve for a monopoly willmonopoly will

a.a. be shaped like the letter be shaped like the letter JJ..

b.b. lie below the demand curve.lie below the demand curve.

c.c. lie above the demand curve.lie above the demand curve.

d.d. be identical to the demand curve.be identical to the demand curve.



6.6. The best example of a natural The best example of a natural monopoly ismonopoly is

a.a. a local electric utility.a local electric utility.

b.b. the U.S. Postal Service.the U.S. Postal Service.

c.c. an airline.an airline.

d.d. a public school.a public school.

6.6. The best example of a natural The best example of a natural monopoly ismonopoly is

a.a. a local electric utility.a local electric utility.

b.b. the U.S. Postal Service.the U.S. Postal Service.

c.c. an airline.an airline.

d.d. a public school.a public school.



7.7. If a monopolist is able to practice If a monopolist is able to practice perfect price discrimination, the result perfect price discrimination, the result will bewill be

a.a. inefficient, but consumers will be better off.inefficient, but consumers will be better off.

b.b. inefficient, and consumers will be worse off.inefficient, and consumers will be worse off.

c.c. efficient, and consumers will be better off.efficient, and consumers will be better off.

d.d. efficient, but consumers will be worse off.efficient, but consumers will be worse off.

7.7. If a monopolist is able to practice If a monopolist is able to practice perfect price discrimination, the result perfect price discrimination, the result will bewill be

a.a. inefficient, but consumers will be better off.inefficient, but consumers will be better off.

b.b. inefficient, and consumers will be worse off.inefficient, and consumers will be worse off.

c.c. efficient, and consumers will be better off.efficient, and consumers will be better off.

d.d. efficient, but consumers will be worse off.efficient, but consumers will be worse off.


The End!The End!Next Chapter 21Next Chapter 21““Oligopoly and Oligopoly and Monopolistic Monopolistic Competition"Competition"

©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 20 “monopoly and antitrust”

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