Monopoly and Monopsony - Managerial Economics - Lecture Slides, Slides for Economics. Acharya Nagarjuna University


Description: Monopoly and Monopsony, Monopoly Characteristics, Profit Maximization, Monopoly Markets, Social Costs, Social Benefits, Monopoly Regulation, Antitrust Policy, Competitive Strategy, Price Makers are the important key points of lecture slides of Managerial Economics.
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Monopoly and Monopsony

Chapter 12

Chapter 12 OVERVIEW

• Monopoly Characteristics • Profit Maximization in Monopoly Markets • Social Costs of Monopoly • Social Benefits From Monopoly • Monopoly Regulation • Monopsony • Antitrust Policy • Competitive Strategy in Monopoly Markets


• monopoly • price makers • monopoly

underproduction • deadweight loss from

monopoly problem • wealth transfer problem • natural monopoly

• patents • regulatory lag • oligopsony • monopsony • monopsony power • bilateral monopoly • antitrust laws • market niche

Monopoly Characteristics

• Basic Features – A single seller. – Unique product. – Blockaded entry and/or exit. – Imperfect dissemination of information. – Opportunity for economic profits in long-run equilibrium.

• Examples of Monopoly – Classic examples include electricity utilities, gas and

sanitary services. – OPEC and the NCAA are popular examples.

Profit Maximization in Monopoly Markets

• Price/Output Decisions • A monopoly firm is the market. • Market and firm demand curve slopes

downward. • Monopoly demand curve is always above the

marginal revenue curve, P = AR > MR. • Monopoly position allows above-normal

profits. – P > AC in long-run equilibrium.

Role of Marginal Analysis

• Set Mπ = MR - MC = 0 to maximize profits. • MR=MC at optimal output.

Social Costs of Monopoly

• Monopoly Underproduction – Monopolists produce too little output. – Monopolists charge prices that are too high.

• 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. • Under monopoly, consumer surplus is transferred to producer


Social Benefits From Monopoly

• Economies of Scale – Monopoly is sometimes the natural result of

vigorous competitive forces. – 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.

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

• Utility Price and Profit Regulation Example • Problems with Utility Price and Profit



• Buyer Power – Oligopsony exists when there are only 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 breeds 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 for criminal violations. – FTC for civil violations.

Competitive Strategy in Monopoly Markets

• Market Niches – Unique goods and services have the potential to create

durable monopoly profits. – A market niche is a market segment that can be

successfully exploited with special capabilities. • Durable, above-normal profits derived from a market niche are not

vulnerable to imitation by competitors.

• Information Barriers to Competitive Strategy – Published data often measure economic profits only

imperfectly. – Business practices protect trade secrets.

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