Monopoly and Monopsony
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
Chapter 12 KEY CONCEPTS
• 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
• 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.
• 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.
• 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.