Unit 7 - MonopolyUnit 7 - Monopoly

Characteristics of a MonopolyCharacteristics of a Monopoly

A monopoly industry is an industry A monopoly industry is an industry with only one seller (mono = 1; poly = with only one seller (mono = 1; poly = seller).seller).

Most monopolies have significant Most monopolies have significant economies of scale.economies of scale.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly Reasons for Monopoly FormingReasons for Monopoly Forming

Monopolies exist for the following reasons:Monopolies exist for the following reasons:

1.1. Legal barriers (U.S. Postal Service)Legal barriers (U.S. Postal Service)

2.2. Patents and copyrights (games, books, tv shows)Patents and copyrights (games, books, tv shows)

3.3. Licenses (doctors, taxi drivers)Licenses (doctors, taxi drivers)

4.4. Trade restrictions (prescription medication)Trade restrictions (prescription medication)

5.5. Exclusive ownership (DeBeers Diamonds Co.)Exclusive ownership (DeBeers Diamonds Co.)

6.6. Economies of Scale Economies of Scale (Microsoft, Intel)(Microsoft, Intel)

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

Types of monopoliesTypes of monopolies

We distinguish between these two types of We distinguish between these two types of monopolies:monopolies:

1.1. Government-granted. The government Government-granted. The government grants the monopoly. Examples: U.S. Postal grants the monopoly. Examples: U.S. Postal Service, gas and electric companies.Service, gas and electric companies.

2.2. Free market. The monopoly is earned through Free market. The monopoly is earned through innovations, efficiency, or resource control. innovations, efficiency, or resource control. Examples: Microsoft, Intel, DeBeers.Examples: Microsoft, Intel, DeBeers.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly Types of monopoliesTypes of monopolies

In the case of government-granted monopolies, there In the case of government-granted monopolies, there is little incentive for the monopoly to earn profits. is little incentive for the monopoly to earn profits. Economic efficiency is unlikely.Economic efficiency is unlikely.

In the case of free market monopolies, there is a threat In the case of free market monopolies, there is a threat of competition. Most firms keep their monopoly status of competition. Most firms keep their monopoly status by operating efficiently, offering quality products and by operating efficiently, offering quality products and low prices. low prices.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

A Monopolist’s Demand CurveA Monopolist’s Demand Curve

Microeconomics

Quantity/Month Price

0 $40

1,000 $35

2,000 $30

3,000 $25

Unit 7 - MonopolyUnit 7 - Monopoly A Monopolist’s Total, Marginal, and A Monopolist’s Total, Marginal, and

Average RevenueAverage Revenue

Microeconomics

Q Price TR AR MR

0 $40 0 - -

1,000 $35 $35,000 $35 $35

2,000 $30 $60,000 $30 $25

3,000 $25 Fill in the

blank

Fill in the

blank

Fill in the

blank

Unit 7 - MonopolyUnit 7 - Monopoly A Monopolist’s Total, Marginal, and A Monopolist’s Total, Marginal, and

Average RevenueAverage Revenue

Microeconomics

Q Price TR AR MR

0 $40 0 - -

1,000 $35 $35,000 $35 $35

2,000 $30 $60,000 $30 $25

3,000 $25 $75,000 $25 $15

Unit 7 - MonopolyUnit 7 - Monopoly A Monopolist’s Demand and Marginal A Monopolist’s Demand and Marginal

Revenue CurveRevenue Curve

Microeconomics

RevenueRevenue

QuantityQuantity

Demand=ARDemand=AR

MRMR

Unit 7 - MonopolyUnit 7 - Monopoly The Profit Maximizing QuantityThe Profit Maximizing Quantity

Microeconomics

RevenueRevenue

QuantityQuantity

Demand = ARDemand = ARMRMR

MCMC

QpmQpm

MR=MCMR=MC

Profit-maximizing quantityProfit-maximizing quantity

Unit 7 - MonopolyUnit 7 - Monopoly The Profit Maximizing PriceThe Profit Maximizing Price

Microeconomics

RevenueRevenue

QuantityQuantity

Demand = ARDemand = ARMRMR

MCMC

QpmQpm

PpmPpm

Profit-Profit-maximizing maximizing priceprice

Unit 7 - MonopolyUnit 7 - Monopoly The Profit AreaThe Profit Area

Microeconomics

RevenueRevenue

QuantityQuantity

Demand = ARDemand = ARMRMR

MCMC

$30$30ATCATC

$27$27

2,0002,000

Unit 7 - MonopolyUnit 7 - Monopoly

United States Anti-trust LegislationUnited States Anti-trust Legislation

Anti-trust = Anti-monopolyAnti-trust = Anti-monopoly

Main anti-trust laws passed in the United States:Main anti-trust laws passed in the United States:

1.1. The Sherman Act of 1890The Sherman Act of 1890

2.2. The Clayton Act of 1914The Clayton Act of 1914

3.3. The Federal Trade Commission Act of 1914The Federal Trade Commission Act of 1914

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

United States Anti-trust LegislationUnited States Anti-trust Legislation

The Sherman Act outlaws all contracts, The Sherman Act outlaws all contracts, combinations and conspiracies that combinations and conspiracies that unreasonably restrain interstate and foreign unreasonably restrain interstate and foreign trade.trade.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

United States Anti-trust LegislationUnited States Anti-trust Legislation

The Clayton Act prohibits:The Clayton Act prohibits: Price discrimination, if it leads to monopoly Price discrimination, if it leads to monopoly

forming.forming. Mergers and acquisitions, which lead to Mergers and acquisitions, which lead to

monopoly forming.monopoly forming. A person from being a director of two or more A person from being a director of two or more

competing corporations.competing corporations. Exclusives dealing arrangements, if these Exclusives dealing arrangements, if these

arrangements lead to monopoly forming. arrangements lead to monopoly forming.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

United States Anti-trust LegislationUnited States Anti-trust Legislation

The Federal Trade Commission Act The Federal Trade Commission Act established the Federal Trade Commission. established the Federal Trade Commission. Along with the anti-trust Division of the Along with the anti-trust Division of the Department of Justice, enforces anti-trust Department of Justice, enforces anti-trust laws.laws.

Microeconomics

Unit 7 - MonopolyUnit 7 - Monopoly

United States Anti-trust LegislationUnited States Anti-trust Legislation

Do we need anti-trust laws?Do we need anti-trust laws?Alan Greenspan and Milton Friedman believe Alan Greenspan and Milton Friedman believe that they do more harm than good.that they do more harm than good.

If a company achieves its monopoly status If a company achieves its monopoly status through efficiency and innovation, then its through efficiency and innovation, then its services, low cost, and low prices can be services, low cost, and low prices can be beneficial for society and our economy.beneficial for society and our economy.

Microeconomics