Lecture 9 - Monopoly and Antitrust Policy Flashcards
Monopoly
A market structure consisting of a firm that is the only seller of a good or service that does not have any close substitutes;
How do firms behave like monopolists?
Collusion
Monopoly Power
Control over price in an effort to obtain positive economic profits
What are the four main sources of barriers to entry in a monopoly?
- Government restricts entry
- Control over a key resource
- Network externalities
- Natural Monopoly
What are the two ways governments restrict entry in a monopoly?
- Intellectual property
2. Public Franchise
Intellectual Property
patents, copyrights, trademarks, among other protections
Public franchise
A government designation that a specific firm is the only legal provider of a good or service
What are two examples of public franchise?
Regulated water and electric providers
Four examples of control over a key resource as a barrier to entry?
- Alcoa
- NFL
- NCAA
- DeBeers diamonds
Network Externality
The usefulness of a product increases with the number of consumers who use it
Natural Monopoly
Economies of scale are so large that one firm can supply an entire market at a lower average total cost than two or more competing firms
Why do natural monopolies arise?
- HUGE up front fixed costs
2. low marginal cost of production
How does a monopolist choose profit maximizing level of output?
Where marginal revenue equals marginal cost
Where is the profit-maximizing cost for a monopoly?
Where the demand curve is above the profit maximizing quantity
True or False: There is no distinction between long run and short run economic profits in a monopoly
True
How does a monopolist’s price and output compare to that of a perfectly competitive firm?
Lower output and higher price
How is monopoly inefficient?
Producer surplus is greater than consumer surplus, there is deadweight loss
Why is deadweight loss due to market power relatively small in the US?
Most firms face some degree of competition,
True or False: Market power incentivizes firms to innovate
True
What is the purpose of antitrust law?
To prevent collusion and encourage competition
horizontal mergers
mergers between firms in the same industry
Vertical mergers
mergers between firms at different stages in the production process of a good
How is a market defined?
Smallest market containing the firm’s products for which an overall price increase within the market would result in total market profits increasing.
If a firm’s profits were to decrease following a price increase, what would this imply?
The existence of close substitutes
