Transcript Chapter 10 Market Power

Chapter 10
Market Power:
Monopoly and
Monopsony
Topics to be Discussed

Monopoly

Monopoly Power

Sources of Monopoly Power

The Social Costs of Monopoly Power
Chapter 10
Slide 2
Topics to be Discussed

Monopsony

Monopsony Power

Limiting Market Power: The Antitrust
Laws
Chapter 10
Slide 3
Perfect Competition

Review of Perfect Competition

P = LMC = LRAC

Normal profits or zero economic profits in
the long run

Large number of buyers and sellers

Homogenous product

Perfect information

Firm is a price taker
Chapter 10
Slide 4
Perfect Competition
Market
P
D
P
S
Individual Firm
LMC
P0
LRAC
P0
D = MR = P
Q0
Q
q0
Q
Monopoly

Monopoly
1) One seller - many buyers
2) One product (no good substitutes)
3) Barriers to entry
Chapter 10
Slide 6
Monopoly

The monopolist is the supply-side of the
market and has complete control over
the amount offered for sale.

Profits will be maximized at the level of
output where marginal revenue equals
marginal cost.
Chapter 10
Slide 7
Monopoly

Finding Marginal Revenue

As the sole producer, the monopolist works
with the market demand to determine
output and price.

Assume a firm with demand:

Chapter 10
P=6-Q
Slide 8
Total, Marginal, and Average Revenue
Price
P
Quantity
Q
$6
5
4
3
2
1
0
1
2
3
4
5
Chapter 10
Total
Revenue
R
$0
5
8
9
8
5
Marginal
Revenue
MR
--$5
3
1
-1
-3
Average
Revenue
AR
--$5
4
3
2
1
Slide 9
Average and Marginal Revenue
$ per
unit of
output
7
6
5
Average Revenue (Demand)
4
3
2
Chapter 10
1
Marginal
Revenue
0
1
2
3
4
5
6
7 Output
Slide 10
Monopoly

Observations
1) To increase sales the price must fall
2) MR < P
3) Compared to perfect competition
Chapter 10

No change in price to change sales

MR = P
Slide 11
Monopoly

Monopolist’s Output Decision
1) Profits maximized at the output level
where MR = MC
2) Cost functions are the same
 (Q)  R(Q)  C (Q)
 / Q  R / Q  C / Q  0  MC  MR
or MC  MR
Chapter 10
Slide 12
Maximizing Profit When Marginal
Revenue Equals Marginal Cost
The Monopolist’s Output Decision

At output levels below MR = MC the
decrease in revenue is greater than the
decrease in cost (MR > MC).

At output levels above MR = MC the
increase in cost is greater than the
decrease in revenue (MR < MC)
Chapter 10
Slide 13
Maximizing Profit When Marginal
Revenue Equals Marginal Cost
$ per
unit of
output
MC
P1
P*
AC
P2
Lost
profit
D = AR
MR
Q1
Chapter 10
Q*
Q2
Lost
profit
Quantity
Slide 14
Monopoly
The Monopolist’s Output Decision

An Example
Cost  C (Q)  50  Q
C
MC 
 2Q
Q
Chapter 10
2
Slide 15
Monopoly
The Monopolist’s Output Decision

An Example
Demand  P(Q)  40  Q
R(Q)  P(Q)Q  40Q  Q
R
MR 
 40  2Q
Q
Chapter 10
2
Slide 16
Monopoly
The Monopolist’s Output Decision

An Example
MR  MC or 40  2Q  2Q
Q  10
When Q  10, P  30
Chapter 10
Slide 17
Monopoly
The Monopolist’s Output Decision

An Example

By setting marginal revenue equal to
marginal cost, it can be verified that profit
is maximized at P = $30 and Q = 10.

This can be seen graphically:
Chapter 10
Slide 18
Example of Profit Maximization
$
C
t'
400
R
300
c’
200
t
Profits
150
100
50
0
Chapter 10
c
5
10
15
20 Quantity
Slide 19
Example of Profit Maximization

Observations





Slope of rr’ = slope cc’
and they are parallel at
10 units
400
Profits are maximized at
10 units
300
P = $30, Q = 10,
TR = P x Q = $300
AC = $15, Q = 10,
TC = AC x Q = 150
Profit = TR - TC
 $150 = $300 - $150
C
$
t'
R
c
200
t
150
Profits
100
50
c
0
5
10
15
20
Quantity
Chapter 10
Slide 20
Example of Profit Maximization
$/Q
40
MC
30
AC
Profit
20
AR
15
10
MR
0
Chapter 10
5
10
15
20
Quantity
Slide 21
Example of Profit Maximization

Observations
$/Q

AC = $15, Q = 10,
TC = AC x Q = 150
40

Profit = TR = TC = $300
- $150 = $150 or
30

Profit = (P - AC) x Q =
($30 - $15)(10) = $150
MC
AC
Profit
20
AR
15
MR
10
0
5
10
15
20
Quantity
Chapter 10
Slide 22
Monopoly

A Rule of Thumb for Pricing

We want to translate the condition that
marginal revenue should equal marginal
cost into a rule of thumb that can be more
easily applied in practice.

This can be demonstrated using the
following steps:
Chapter 10
Slide 23
A Rule of Thumb for Pricing
R ( PQ )
1. MR 

Q
Q
P
 Q  P 

2. MR  P  Q
 P  P 
Q
 P  Q 

Q




P
3. Ed  



P 
 Q 
Chapter 10
Slide 24
A Rule of Thumb for Pricing
1
Q




P
4. 




Q  E
 P 
d
 1
5. MR  P P
 Ed
Chapter 10



Slide 25
A Rule of Thumb for Pricing
6.  is maximized @ MR  MC
 1 
1
P  P

ED
 ED 
MC
P
1 1 ED 
Chapter 10
Slide 26
A Rule of Thumb for Pricing
1
= the markup over MC as a
7. 
Ed
percentage of price (P-MC)/P
8. The markup should equal the
inverse of the elasticity of demand.
Chapter 10
Slide 27
A Rule of Thumb for Pricing
MC
9. P 


1
1 

E
d 

Assume
Ed  4 MC  9
9
P
1 1
4

Chapter 10

9

 $12
.75
Slide 28
Monopoly

Monopoly pricing compared to perfect
competition pricing:

Monopoly
P > MC

Perfect Competition
P = MC
Chapter 10
Slide 29
Monopoly

Monopoly pricing compared to perfect
competition pricing:

The more elastic the demand the closer
price is to marginal cost.

If Ed is a large negative number, price is
close to marginal cost and vice versa.
Chapter 10
Slide 30
Astra-Merck Prices Prilosec
The Monopolist’s Output Decision

1995
 Price
 Price
of Prilosec = $3.50/daily dose
of Tagamet and Zantac =
- $2.25/daily dose
 MC
Chapter 10
$1.50
of Prolosec = 30 - 40 cents/daily dose
Slide 31
Astra-Merck Prices Prilosec
The Monopolist’s Output Decision
MC
.35
P


1  1 ED  1  1  1.1
MC
.35

 $3.89
1   .91 .09
•Price of $3.50 is consistent with
“the rule of thumb pricing”
Chapter 10
Slide 32
Monopoly

Shifts in Demand

In perfect competition, the market supply
curve is determined by marginal cost.

For a monopoly, output is determined by
marginal cost and the shape of the
demand curve.
Chapter 10
Slide 33
Shift in Demand Leads to
Change in Price but Same Output
$/Q
MC
P1
P2
D2
D1
MR2
MR1
Q1= Q2
Chapter 10
Quantity
Slide 34
Shift in Demand Leads to
Change in Output but Same Price
$/Q
MC
P1 = P2
D2
MR2
D1
MR1
Q1
Chapter 10
Q2
Quantity
Slide 35
Monopoly

Observations
 Shifts
in demand usually cause a change
in both price and quantity.
 A monopolistic
market has no supply
curve.
Chapter 10
Slide 36
Monopoly

Observations
 Monopolist
may supply many different
quantities at the same price.
 Monopolist
may supply the same quantity
at different prices.
Chapter 10
Slide 37
Monopoly

The Effect of a Tax


Under monopoly price can sometimes rise
by more than the amount of the tax.
To determine the impact of a tax:

t = specific tax

MC = MC + t

MR = MC + t : optimal production decision
Chapter 10
Slide 38
Effect of Excise Tax on Monopolist
$/Q
Increase in P: P0P1 > increase in tax
P1
P
P0
MC + tax
D = AR
MC
MR
t
Q1
Chapter 10
Q0
Quantity
Slide 39
Effect of Excise Tax on Monopolist

Question

Suppose: Ed = -2

How much would the price change?
Chapter 10
Slide 40
Effect of Excise Tax on Monopolist

Answer
MC
P
1   1 
 Ed 
If Ed  2  P  2MC
If MC increases to MC  t
P  2( MC  t )  2MC  2t
Price increases by twice the tax.

What would happen to profits?
Chapter 10
Slide 41
Monopoly

The Multiplant Firm

Chapter 10
For many firms, production takes place in
two or more different plants whose
operating cost can differ.
Slide 42
Monopoly

The Multiplant Firm

Chapter 10
Choosing total output and the output for
each plant:

The marginal cost in each plant should
be equal.

The marginal cost should equal the
marginal revenue for each plant.
Slide 43
Monopoly
The Multiplant Firm

Algebraically:
Q1 & C1  Output & Cost for Plant 1
Q2 & C2  Output & Cost for Plant 2
Total Output  QT  Q1  Q2
Chapter 10
Slide 44
Monopoly
The Multiplant Firm

Algebraically:
  PQT  C1 (Q1 )  C2 (Q2 )
 ( PQT ) C1


0
Q1
Q1
Q1
Chapter 10
Slide 45
Monopoly
The Multiplant Firm

Algebraically:
( PQT )
C1
( MR )
 ( MC )
0
Q1
Q1
MR  MC1
Chapter 10
Slide 46
Monopoly

Algebraically:
MR  MC1
MR  MC 2
MR  MC1  MC 2
Chapter 10
Slide 47
Production with Two Plants
$/Q
MC1
MC2
MCT
P*
D = AR
MR*
MR
Q1
Chapter 10
Q2
Q3
Quantity
Slide 48
Production with Two Plants

Observations:
1) MCT = MC1 + MC2
$/Q
MC1 MC2
2) Profit maximizing
output:




MCT = MR at QT and
P*
MR = MR*
MR* = MC1 at Q1,
MC* = MC2 at Q2
MC1 + MC2 = MCT, Q1
+ Q2 = QT,
and MR = MC1 + MC2
Chapter 10
MCT
P*
D = AR
MR*
MR
Q1
Q2
Q3
Quantity
Slide 49
Monopoly Power

Monopoly is rare.

However, a market with several firms,
each facing a downward sloping
demand curve will produce so that price
exceeds marginal cost.
Chapter 10
Slide 50
Monopoly Power

Scenario:

Chapter 10
Four firms with equal share (5,000) of a
market for 20,000 toothbrushes at a price
of $1.50.
Slide 51
The Demand for Toothbrushes
$/Q
$/Q
At a market price
of $1.50, elasticity of
demand is -1.5.
2.00
2.00
The demand curve for Firm A
depends on how much
their product differs, and
how the firms compete.
1.60
1.50
1.50
1.40
Market
Demand
1.00
1.00
10,000
20,000
30,000
Quantity
3,000
5,000
7,000
QA
The Demand for Toothbrushes
$/Q
$/Q
At a market price
of $1.50, elasticity of
demand is -1.5.
2.00
2.00
Firm A sees a much more
elastic demand curve due to
competition--Ed = -.6. Still
Firm A has some monopoly
power and charges a price
which exceeds MC.
1.60
1.50
MCA
1.50
1.40
DA
Market
Demand
1.00
MRA
1.00
10,000
20,000
30,000
Quantity
3,000
5,000
7,000
QA
Monopoly Power

Measuring Monopoly Power

In perfect competition: P = MR = MC

Monopoly power: P > MC
Chapter 10
Slide 54
Monopoly Power

Lerner’s Index of Monopoly Power

L = (P - MC)/P


Chapter 10
The larger the value of L (between 0 and
1) the greater the monopoly power.
L is expressed in terms of Ed

L = (P - MC)/P = -1/Ed

Ed is elasticity of demand for a firm, not
the market
Slide 55
Monopoly Power

Monopoly power does not guarantee
profits.

Profit depends on average cost relative
to price.

Question:

Chapter 10
Can you identify any difficulties in using the
Lerner Index (L) for public policy?
Slide 56
Monopoly Power

The Rule of Thumb for Pricing
MC
P
1 1 Ed 

Chapter 10
Pricing for any firm with monopoly power

If Ed is large, markup is small

If Ed is small, markup is large
Slide 57
Elasticity of Demand and Price Markup
$/Q
$/Q
The more elastic is
demand, the less the
markup.
P*
MC
MC
P*
AR
P*-MC
MR
AR
MR
Q*
Quantity
Q*
Quantity
Markup Pricing:
Supermarkets to Designer Jeans

Supermarkets
1. Several firms
2. Similar product
3. Ed  10 for individual stores
MC
MC
4 .P 

 1.11( MC )
1  1  .1 0.9
5. Prices set about 10 - 11% above MC.
Chapter 10
Slide 59
Markup Pricing:
Supermarkets to Designer Jeans

Convenience Stores
1. Higher prices than supermarke ts
2. Convenienc e differenti ates them
3. Ed  5
MC
MC
4.P 

 1.25( MC )
1  1  5 0.8
5. Prices set about 25% above MC.
Chapter 10
Slide 60
Markup Pricing:
Supermarkets to Designer Jeans
Convenience Stores

Convenience stores have more
monopoly power.

Question:

Chapter 10
Do convenience stores have higher profits
than supermarkets?
Slide 61
Markup Pricing:
Supermarkets to Designer Jeans
Designer Jeans

Designer jeans
Ed = -3 to -4
Chapter 10

Price 33 - 50% > MC

MC = $12 - $18/pair

Wholesale price = $18 - $27
Slide 62
The Pricing of
Prerecorded Videocassettes
1985
Title
1999
Retail Price($)
Purple Rain
Raiders of the Lost Ark
Jane Fonda Workout
Title
Retail Price($)
$29.98 Austin Powers
24.95 A Bug’s Life
59.95 There’s Something
about Mary
The Empire Strikes Back
79.98 Tae-Bo Workout
An Officer and a Gentleman 24.95 Lethal Weapon 4
Star Trek: The Motion Picture 24.95 Men in Black
Star Wars
39.98 Armageddon
$10.49
17.99
13.99
24.47
16.99
12.99
15.86
The Pricing of
Prerecorded Videocassettes

What Do You Think?
 Should
producers lower the price of
videocassettes to increase sales and
revenue?
Sources of Monopoly Power

Why do some firm’s have considerable
monopoly power, and others have little
or none?

A firm’s monopoly power is determined
by the firm’s elasticity of demand.
Chapter 10
Slide 65
Sources of Monopoly Power

The firm’s elasticity of demand is
determined by:
1) Elasticity of market demand
2) Number of firms
3) The interaction among firms
Chapter 10
Slide 66
The Social Costs of Monopoly Power

Monopoly power results in higher prices
and lower quantities.

However, does monopoly power make
consumers and producers in the
aggregate better or worse off?
Chapter 10
Slide 67
Deadweight Loss from Monopoly Power
$/Q
Lost Consumer Surplus
Deadweight
Loss
Because of the higher
price, consumers lose
A+B and producer
gains A-C.
MC
Pm
A
B
C
PC
AR
MR
Qm
Chapter 10
QC
Quantity
Slide 68
The Social Costs of Monopoly Power

Rent Seeking

Chapter 10
Firms may spend to gain monopoly power

Lobbying

Advertising

Building excess capacity
Slide 69
The Social Costs of Monopoly Power

The incentive to engage in monopoly
practices is determined by the profit to
be gained.

The larger the transfer from consumers
to the firm, the larger the social cost of
monopoly.
Chapter 10
Slide 70
The Social Costs of Monopoly Power

Example


1996 Archer Daniels Midland (ADM)
successfully lobbied for regulations
requiring ethanol be produced from corn
Question

Chapter 10
Why only corn?
Slide 71
The Social Costs of Monopoly Power

Price Regulation


Recall that in competitive markets, price
regulation created a deadweight loss.
Question:

Chapter 10
What about a monopoly?
Slide 72
Price Regulation
$/Q
Marginal revenue curve
when price is regulated
to be no higher that P1.
MR
MC
Pm
P1
P2 = P C
AC
P3
P4
AR
Forprice
output
levels
above Q1 ,
below
P
results
If Any
price
is
lowered
to
PC output
4
Ifthe
leftoriginal
alone, a
monopolist
average
and
inIfthe
firm
incurring
a to
loss.
price
is
lowered
P
increases
to
its
maximum
3Qoutput
produces
Q
and
charges
Pm.
C and
m
marginal revenue curves apply.
decreases
a shortage
exists.
there is noand
deadweight
loss.
Qm Q1
Chapter 10
Q3
Qc
Q’3
Quantity
Slide 73
The Social Costs of Monopoly Power

Natural Monopoly
 A firm
that can produce the entire output of
an industry at a cost lower than what it
would be if there were several firms.
Chapter 10
Slide 74
Regulating the Price
of a Natural Monopoly
$/Q
Natural monopolies occur
because of extensive
economies of scale
Quantity
Chapter 10
Slide 75
Regulating the Price
of a Natural Monopoly
$/Q
Unregulated, the monopolist
would produce Qm and
charge Pm.
If the price were regulate to be PC,
the firm would lose money
and go out of business.
Pm
Setting the price at Pr
yields the largest possible
output;excess profit is zero.
AC
Pr
MC
PC
AR
MR
Qm
Chapter 10
Qr
QC
Quantity
Slide 76
The Social Costs of Monopoly Power

Regulation in Practice

Chapter 10
It is very difficult to estimate the firm's cost
and demand functions because they
change with evolving market conditions
Slide 77
The Social Costs of Monopoly Power

Regulation in Practice

An alternative pricing technique---rate-ofreturn regulation allows the firms to set a
maximum price based on the expected rate
or return that the firm will earn.
 P = AVC + (D + T + sK)/Q, where
P
= price, AVC = average variable cost
 D = depreciation, T = taxes
 s = allowed rate of return, K = firm’s capital
stock
Chapter 10
Slide 78
The Social Costs of Monopoly Power


Regulation in Practice

Using this technique requires hearings to
arrive at the respective figures.

The hearing process creates a regulatory
lag that may benefit producers (1950s &
60s) or consumers (1970s & 80s).
Question

Chapter 10
Who is benefiting in the 1990s?
Slide 79
Monopsony

A monopsony is a market in which there
is a single buyer.

An oligopsony is a market with only a
few buyers.

Monopsony power is the ability of the
buyer to affect the price of the good and
pay less than the price that would exist
in a competitive market.
Chapter 10
Slide 80
Monopsony

Competitive Buyer

Price taker

P = Marginal expenditure = Average
expenditure

D = Marginal value
Chapter 10
Slide 81
Competitive Buyer
Compared to Competitive Seller
$/Q
Buyer
$/Q
Seller
ME = AE
P*
MC
AR = MR
P*
MR = MC
P* = MR
P* = MC
ME = MV at Q*
ME = P*
P* = MV
D = MV
Q*
Quantity
Q*
Quantity
Monopsonist Buyer
$/Q
The market supply curve is the monopsonist’s
average expenditure curve
ME
Monopsony
•ME > P & above S
S = AE
Competitive
•P = PC
•Q = Q+C
PC
P*m
MV
Q*m
Chapter 10
QC
Quantity
Slide 83
Monopoly and Monopsony
$/Q
Monopoly
Note: MR = MC;
AR > MC; P > MC
MC
P*
PC
AR
MR
Q*
Chapter 10
QC
Quantity
Slide 84
Monopoly and Monopsony
$/Q
ME
Monopsony
Note: ME = MV;
ME > AE; MV > P
S = AE
PC
P*
MV
Q*
Chapter 10
QC
Quantity
Slide 85
Monopoly and Monopsony

Monopoly

Monopsony

MR < P

ME > P

P > MC

P < MV

Qm < QC

Qm < QC

Pm > PC

Pm < PC
Chapter 10
Slide 86
Monopsony Power

A few buyers can influence price (e.g.
automobile industry).

Monopsony power gives them the ability
to pay a price that is less than marginal
value.
Chapter 10
Slide 87
Monopsony Power

The degree of monopsony power
depends on three similar factors.
1) Elasticity of market supply

Chapter 10
The less elastic the market supply, the
greater the monopsony power.
Slide 88
Monopsony Power

The degree of monopsony power
depends on three similar factors.
2) Number of buyers

Chapter 10
The fewer the number of buyers, the less
elastic the supply and the greater the
monopsony power.
Slide 89
Monopsony Power

The degree of monopsony power
depends on three similar factors.
3) Interaction Among Buyers

Chapter 10
The less the buyers compete, the greater
the monopsony power.
Slide 90
Monopsony Power:
Elastic versus Inelastic Supply
ME
$/Q
$/Q
MV - P*
MV - P*
S = AE
ME
S = AE
P*
P*
MV
Q*
Quantity
MV
Q*
Quantity
Deadweight Loss from
Monopsony Power

Determining the
deadweight loss in
monopsony


$/Q
ME
Change in seller’s
surplus = -A-C
Change in buyer’s
surplus = A - B

Change in welfare =
-A - C + A - B = -C - B

Inefficiency occurs
because less is purchased
Deadweight Loss
S = AE
PC
P*
A
B
C
MV
Q*
Chapter 10
QC
Quantity
Slide 92
Monopsony Power
The Social Costs of Monopsony Power

Bilateral Monopoly

Chapter 10
Bilateral monopoly is rare, however,
markets with a small number of sellers with
monopoly power selling to a market with
few buyers with monopsony power is more
common.
Slide 93
Monopsony Power
The Social Costs of Monopsony Power

Question

Chapter 10
In this case, what is likely to happen to
price?
Slide 94
Limiting Market Power:
The Antitrust Laws

Antitrust Laws:

Promote a competitive economy

Rules and regulations designed to promote
a competitive economy by:
Chapter 10

Prohibiting actions that restrain or are
likely to restrain competition

Restricting the forms of market
structures that are allowable
Slide 95
Limiting Market Power:
The Antitrust Laws

Sherman Act (1890)

Section 1
Prohibits
contracts, combinations, or
conspiracies in restraint of trade
 Explicit
agreement to restrict output or fix
prices
 Implicit collusion through parallel conduct
Chapter 10
Slide 96
Limiting Market Power:
The Antitrust Laws
Examples of Illegal Combinations

1983
 Six
companies and six executives indicted
for price of copper tubing

1996
 Archer
Daniels Midland (ADM) pleaded
guilty to price fixing for lysine -- three
sentenced to prison in 1999
Chapter 10
Slide 97
Limiting Market Power:
The Antitrust Laws
Examples of Illegal Combinations

1999
 Roche A.G.,
BASF A.G., Rhone-Poulenc
and Takeda pleaded guilty to price fixing of
vitamins -- fined more than $1 billion.
Chapter 10
Slide 98
Limiting Market Power:
The Antitrust Laws

Sherman Act (1890)

Section 2
Makes
it illegal to monopolize or
attempt to monopolize a market and
prohibits conspiracies that result in
monopolization.
Chapter 10
Slide 99
Limiting Market Power:
The Antitrust Laws

Clayton Act (1914)
1) Makes it unlawful to require a buyer
or lessor not to buy from a
competitor
2) Prohibits predatory pricing
Chapter 10
Slide 100
Limiting Market Power:
The Antitrust Laws

Clayton Act (1914)
3) Prohibits mergers and acquisitions if
they “substantially lessen
competition” or “tend to create a
monopoly”
Chapter 10
Slide 101
Limiting Market Power:
The Antitrust Laws

Robinson-Patman Act (1936)

Chapter 10
Prohibits price discrimination if it is likely to
injure the competition
Slide 102
Limiting Market Power:
The Antitrust Laws

Federal Trade Commission Act (1914,
amended 1938, 1973, 1975)
1) Created the Federal Trade
Commission (FTC)
2) Prohibitions against deceptive
advertising, labeling, agreements
with retailer to exclude competing
brands
Chapter 10
Slide 103
Limiting Market Power:
The Antitrust Laws

Antitrust laws are enforced three ways:
1) Antitrust Division of the Department
of Justice
Chapter 10

A part of the executive branch--the
administration can influence
enforcement

Fines levied on businesses; fines and
imprisonment levied on individuals
Slide 104
Limiting Market Power:
The Antitrust Laws

Antitrust laws are enforced three ways:
2) Federal Trade Commission

Chapter 10
Enforces through voluntary
understanding or formal commission
order
Slide 105
Limiting Market Power:
The Antitrust Laws

Antitrust laws are enforced three ways:
3) Private Proceedings
Chapter 10

Lawsuits for damages

Plaintiff can receive treble damages
Slide 106
Limiting Market Power:
The Antitrust Laws

Two Examples
 American Airlines
-- Price fixing
 Microsoft
Chapter 10

Monopoly power

Predatory actions

Collusion
Slide 107
Summary

Market power is the ability of sellers or
buyers to affect the price of a good.

Market power can be in two forms:
monopoly power and monopsony
power.
Chapter 10
Slide 108
Summary

Monopoly power is determined in part
by the number of firms competing in the
market.

Monopsony power is determined in part
by the number of buyers in the market.
Chapter 10
Slide 109
Summary

Market power can impose costs on
society.

Sometimes, scale economies make
pure monopoly desirable.

We rely on the antitrust laws to prevent
firms from obtaining excessive market
power.
Chapter 10
Slide 110
End of Chapter 10
Market Power:
Monopoly and
Monopsony