Chapter 8The Economics of Monopoly

Power: Who Does What to Whom?

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

8-2

The Economics of Monopoly Power

• Monopoly• Imperfect

Competition• Monopoly Power –

extent of control over supply of product

• Concentration Ratio

Industry Concentration Ratio

House Slipper Manufacturing 96.8

Cigarettes 95.3

Breweries 90.8

Primary aluminum 85.8

Cereal breakfast foods 82.0

Aircraft engines 76.9

Automobile manufacturing 75.5

Soap and other detergents 60.6

Snack foods 56.2

Electronic computers 49.5

Cement 38.7

Petroleum refineries 41.2

Synthetic rubber 39.0

Cement 38.7

Apparel manufacturing 17.3

8-3

Outputs and Prices

Quantity per unit of time

Price D

D

P’

P2

P1

x2 x1x’

If seller raises price to P2, quantity

demanded will fall to x2

8-4

Prices and Output in a Competitive Market

Quantity per unit of time Quantity per unit of time

Price Price

Px Px

D

D

S

S

MC

MR

d d

Xx

Table

8-5

Marginal Costs and Supply in a Competitive Market

Quantity per unit of time

Quantity per unit of time (000)

Price Price D

D

S

S

MCs

MR

d d

MR1

d1 d1

3 37 7

a

b

A

B

14

10 10

14

Outputs, Revenues, Costs, and Profits for a Monopoly Firm

1 2 3 4 5 6 7

Output Total Cost (TC)

Marginal Cost (MC)

Price (Px)

Total Revenue

(TR)

Marginal Revenue (MR)

Profits

0 0 20 0 0

1 8 8 20 20 20 12

2 17 9 19 38 18 21

3 27 10 18 54 16 27

4 38 11 17 68 14 30

5 50 12 16 80 12 30

6 63 13 15 90 10 27

7 77 14 14 98 8 21

8 92 15 13 104 6 12

9 108 16 12 108 4 0

10 125 17 11 110 2 -15

8-6

8-7

Competition versus Monopoly

Quantity per unit of time (000)

D

D = MSB

S = MSC

MRS = MC

8-8

Entry Restrictions• Private barriers

Ownership of key raw material Threat of lower prices Product differentiation Network economies

• Government barriers Regulatory commissions and entry-blocking rules Occupational licensing laws Import duties and import restrictions Patents and copyrights Exclusive franchises Zoning ordinances and building codes

8-9

Nonprice Competition

• Advertising

• Periodic change in design and quality of product

8-10

Should We Fear Monopoly Power?

• Welfare Cost of Monopoly

• Entry Restrictions and Resource Allocation

• Nonprice Competition

• What is Bigness? Too big to fail?

8-11

Average cost rises as more is

produced

The Peculiar Case of Natural Monopoly

Quantity per unit of time

Price $

Q0

economies of scale diseconomies of scale

Average cost minimized

Average cost falls as more is

produced

8-12

When Should Government Regulate Business?

• When should government regulate business? Market failure

Consumers lack informationPoorly defined property rights

Benefits of regulation exceed the costCapture theory

• Deregulation movement

8-13

Regulation and Corporate Responsibility

• Corporations

• Corporate stock

• Advantages of corporate form – limited liability

• Disadvantages of corporate form – agency problem

• Use of stock options

8-14

Outputs, Revenues, Costs, and Profits for a Competitive Firm

1 2 3 4 5 6 7

Output Total Cost (TC)

Marginal Cost (MC)

Price (Px) Total Revenue (TR)

Marginal Revenue (MR)

Profits

0 0 14 0 0

1 8 8 14 14 14 6

2 17 9 14 28 14 11

3 27 10 14 42 14 15

4 38 11 14 56 14 18

5 50 12 14 70 14 20

6 63 13 14 84 14 21

7 77 14 14 98 14 21

8 92 15 14 112 14 20

9 108 16 14 126 14 18

10 125 17 14 140 14 15