hubbard01_instructorppt14.ppt

Monopoly and Antitrust Policy,2 of 30,In this chapter,we will develop an economic model of monopolies that can help us to analyze their effects on the economy.,After studying this chapter,you should be able to:Define monopoly.Explain the four main reasons monopolies arise.Explain how a monopoly chooses price and output.Use a graph to illustrate how monopoly affects economic surplus.Discuss government policies toward monopoly.,Time Warner Rules Manhattan,LEARNING OBJECTIVES,3 of 30,Is Any Firm Ever Really a Monopoly?,Monopoly The only seller of a good or service that does not have a close substitute.,4 of 30,Is Xbox a Close Substitute forPlayStation 2?,14-1,To many gamers,PlayStation 2 is a close substitute for Xbox.,5 of 30,Is the Xbox 360 a CloseSubstitute for the PlayStation 3?,To many gamers,Microsofts Xbox is a better deal than PlayStation 3.,Define monopoly.,14.1 LEARNING OBJECTIVE,With consumers apparently viewing the two systems primarily as game consoles,the Xbox had a significant advantage because it was priced$100 less than the PS3.,YOUR TURN:Test your understanding by doing related problem 1.7 at the end of this chapter.,6 of 30,Where Do Monopolies Come From?,Barriers to entry may be high enough to keep out competing firms for four main reasons:Government blocks the entry of more than one firm into a market.One firm has control of a key raw material necessary to produce a good.There are important network externalities in supplying the good or service.Economies of scale are so large that one firm has a natural monopoly.,7 of 30,Where Do Monopolies Come From?,Entry Blocked by Government ActionBy granting a patent or copyright to an individual or firm,which gives it the exclusive right to produce a product.By granting a firm a public franchise,which makes it the exclusive legal provider of a good or service.,8 of 30,The End of the Christmas Plant Monopoly,14-2,At one time,the Ecke family had a monopoly on growing poinsettias,but many new firms entered the industry.,9 of 30,Where Do Monopolies Come From?,PATENTS AND COPYRIGHTSPatent The exclusive right to a product for a period of 20 years from the date the product was invented.Copyright The legal right of the creator of a book,film,or piece of music to exclusive right to the creation.PUBLIC FRANCHISESPublic franchise A designation by the government that a firm is the only legal provider of a good or service.CONTROL OF A KEY RESOURCEAnother way for a firm to become a monopoly is by controlling a key resource.This happens infrequently because most resources are widely available from a variety of suppliers.,10 of 30,Are Diamond(Profits)Forever?The De Beers Diamond Monopoly,14-3,DeBeers promoted the sentimental value of diamonds as a way to maintain its position in the diamond market.,11 of 30,Where Do Monopolies Come From?,Network ExternalitiesNetwork externalities Exist when the usefulness of a product increases with the number of consumers who use it.,12 of 30,Where Do Monopolies Come From?,Natural MonopolyNatural monopoly A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.,14-1,13 of 30,Is the“Proxy Business”a Natural Monopoly?,14-1,14 of 30,How Does a Monopoly Choose Price and Output?,Marginal Revenue Once AgainRemember that when a firm cuts the price of a product,one good thing and one bad thing happens:The good thing:It sells more units of the product.The bad thing:It receives less revenue from each unit than it would have received at the higher price.,15 of 30,How Does a Monopoly Choose Price and Output?,Marginal Revenue Once Again,16 of 30,How Does a Monopoly Choose Price and Output?,Profit Maximization For a Monopolist,17 of 30,Finding Profit Maximizing Price and Output for a Monopolist,14-2,Dont Assume That Charging a Higher Price Is Always More Profitable For a Monopolist,18 of 30,Does Monopoly Reduce Economic Efficiency?,Comparing Monopoly and Competition,19 of 30,Does Monopoly Reduce Economic Efficiency?,Measuring the Efficiency Losses from Monopoly,14-5,We can summarize the effects of monopoly as follows:Monopoly causes a reduction in consumer surplus.Monopoly causes an increase in producer surplus.Monopoly causes a deadweight loss,which represents a reduction in economic efficiency.,20 of 30,Does Monopoly Reduce Economic Efficiency?,How Large Are the Efficiency Losses Due to Monopoly?Market power The ability of a firm to charge a price greater than marginal cost.Market Power and Technological ChangeThe introduction of new products requires firms to spend funds on research and development.Because firms with market power are more likely to earn economic profits,they are also more likely to introduce new products.,21 of 30,Government Policy toward Monopoly,Collusion An agreement among firms to charge the same price,or to otherwise not compete.Antitrust Laws and Antitrust EnforcementAntitrust laws Laws aimed at eliminating collusion and promoting competition among firms.,22 of 30,Government Policy toward Monopoly,Antitrust Laws and Antitrust Enforcement,14 1,23 of 30,Government Policy toward Monopoly,Mergers:The Trade-off between Market Power and EfficiencyHorizontal mergers Mergers between firms in the same industry.Vertical mergers Mergers between firms at different stages of production of a good.,24 of 30,Government Policy toward Monopoly,Mergers:The Trade-Off between Market Power and Efficiency,14-6,25 of 30,Government Policy toward Monopoly,The Department of Justice and the Federal Trade Commission Merger Guidelines,Market definitionMeasure of concentrationMerger standards,26 of 30,Government Policy toward Monopoly,The Department of Justice and the Federal Trade Commission Merger Guidelines,MEASURE OF CONCENTRATION1 firm,100%market share(a monopoly):HHI=1002=10,0002 firms,each with a 50%market share:HHI=502+502=5,0004 firms,with market shares of 30%,30%,20%,and 20%:HHI=302+302+202+202=2,60010 firms,each with market shares of 10%:HHI=10(102)=1,000,27 of 30,Government Policy toward Monopoly,The Department of Justice and the Federal Trade Commission Merger Guidelines,MERGER STANDARDSPost-Merger HHI Below 1,000.These markets are not concentrated,so mergers in them are not challenged.Post-Merger HHI Between 1,000 and 1,800.These markets are moderately concentrated.Mergers that raise the HHI by less than 100 will probably not be challenged.Mergers that raise the HHI by more than 100 may be challenged.Post-Merger HHI Above 1,800.These markets are highly concentrated.Mergers that increase the HHI by less than 50 points will not be challenged.Mergers that increase the HHI by 50 to 100 points may be challenged.Mergers that increase the HHI by more than 100 points will be challenged.,28 of 30,The Antitrust Case Against Microsoft,14-4,Software pioneer,monopolist,or both?,29 of 30,Have Google and MicrosoftViolated the Antitrust Laws?,Discuss government policies toward monopoly.,14.5 LEARNING OBJECTIVE,Does Googles monopoly power harm consumers?,The debate over the governments role in promoting competition seems certain to continue.,YOUR TURN:Test your understanding by doing related problems 5.6 and 5.15 at the end of this chapter.,30 of 30,Government Policy toward Monopoly,Regulating Natural Monopolies,14-7,31 of 30,Why Im Filing Chapter 11,32 of 30,The End of the Cable TV Monopoly?,AN INSIDE LOOK,Competition lowers the price of cable TV and increases economic efficiency.,33 of 30,Antitrust lawsCollusionCopyrightHorizontal mergersMarket powerMonopoly,Natural monopolyNetwork externalitiesPatentPublic franchiseVertical mergers,