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.