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8/4/2019 Imperfect Markets
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Monopoly
and Antitrust Policy
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Imperfect Competition andMarket Power: Core Concepts
An imperfectly competitive industryisan industry in which single firms havesome control over the price of their output.
Market poweris the imperfectlycompetitive firms ability to raise price
without losing all demand for its product.
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Pure Monopoly
A pure monopolyis an industry with asingle firm that produces a product forwhich there are no close substitutes and in
which significant barriers to entry preventother firms from entering the industry tocompete for profits.
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Barriers to Entry
A barrier to entryissomething that prevents new
firms from entering andcompeting in imperfectlycompetitive industries.
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Barriers to Entry
Barriers to entry include:
Government franchises, or
firms that become monopoliesby virtue of a governmentdirective.
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Barriers to Entry
Barriers to entry include:
Patentsor barriers that grant
the exclusive use of thepatented product or process tothe inventor.
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Barriers to Entry
Barriers to entry include:
Economies of scale and other
cost advantagesenjoyed byindustries that have large capitalrequirements. A large initialinvestment, or the need to
embark in an expensiveadvertising campaign, deterwould-be entrants to theindustry.
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Barriers to Entry
Barriers to entry include:
Ownership of a scarce factor
of production: If productionrequires a particular input, andone firm owns the entire supplyof that input, that firm will control
the industry.
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Price: The Fourth DecisionVariable
Firms with market power must decide:
1. how much to produce,
2. how to produce it,3. how much to demand in each input
market, and
4. what price to charge for their output.
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Price and Output Decisionsin Pure Monopoly Markets
To analyze monopoly behavior we assume that:
Entry to the market is blocked
Firms act to maximize profit
The pure monopolist buys inputs in competitive inputmarkets
The monopolistic firm cannot price discriminate
The monopoly faces a known demand curve
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Price and Output Decisionsin Pure Monopoly Markets
In a monopoly market, there is nodistinction between the firm and theindustry because the firm is the industry.
The market demand curve is the demandcurve facing the firm, and total quantitysupplied in the market is what the firmdecides to produce.
M i l R
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Marginal RevenueFacing a Monopolist
Marginal Revenue Facing a Monopolist
(1)QUANTIT
Y
(2)PRICE
(3)TOTAL
REVENUE
(4)MARGINALREVENUE
0 $11 0 -
1 10 $10 $10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4
9 2 18 -6
10 1 10 -8
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Marginal Revenueand Market Demand
At every level ofoutput except one
unit, a monopolistsmarginal revenue isbelow price.
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Marginal Revenue and TotalRevenue
The marginal revenuecurve shows thechange in total
revenue that results asa firm moves along thesegment of thedemand curve that lies
exactly above it. Total revenue is
maximum whenmarginal revenue
equals zero.
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The Monopolists Profit-Maximizing Price and Output
The profit-maximizinglevel of output (Qm)occurs where MR= MC.
Notice that the outcome
is different from that ofperfect competition.Here, the price ($4.00)is less than themarginal cost ($1.50),
and the monopolistearns positive economicprofit.
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The Absence of aSupply Curve in Monopoly
A monopoly firm has no supply curve thatis independent of the demand curve for itsproduct.
A monopolist sets both price and quantity,and the amount of output supplieddepends on both its marginal cost curve
and the demand curve that it faces.
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Monopolistic Competition
and Oligopoly
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Characteristics ofDifferent Market Organizations
Numberof firms
Productsdifferentiated
orhomogeneous
Price adecisionvariable
Freeentry
Distinguishedby Examples
Perfect
competition
Many Homogeneous No YesPrice
competition onlyWheat farmer
Textile firm
Monopoly OneA single,
unique productYes No
Still constrainedby marketdemand
Public utilityPatented Drug
Monopolisticcompetition
Many DifferentiatedYes, butlimited
YesPrice and quality
competitionRestaurantsHand soap
Oligopoly Few Either Yes LimitedStrategicbehavior
AutomobilesAluminum
Not every industry fits neatly into one of thesecategories; however, this is a useful framework for
thinking about industry structure and behavior.
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Monopolistic Competition
A monopolistically competitiveindustry has the following
characteristics: A large number of firms
No barriers to entry
Product differentiation
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Product Differentiation,Advertising, and Social Welfare
Product differentiationis a strategythat firms use to achieve marketpower. Accomplished by producing
products that have distinct positiveidentities in consumers minds. This
differentiation is often accomplished
through advertising.
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Oligopoly
An oligopolyis a form of industry(market) structure characterized by
a few dominant firms. Productsmay be homogeneous ordifferentiated.
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Oligopoly Models
All kinds of oligopoly have one thingin common:
The behavior of any given oligopolisticfirm depends on the behavior of theother firms in the industry.
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The Collusion Model
A group of firms that gets togetherand makes price and output
decisions to maximize joint profits iscalled a cartel.
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Contestable Markets
A market is perfectly contestableif entryto it andexit from it are costless.
In contestable markets, even largeoligopolistic firms end up behaving likeperfectly competitive firms. Prices arepushed to long-run average cost by
competition, and positive profits do notpersist.