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12th Edition

Mark Hirschey
Monopoly and Monopsony
Chapter 12
Chapter 12
 Monopoly Market Characteristics
 Profit Maximization in Monopoly Markets
 Social Costs of Monopoly
 Social Benefits of Monopoly
 Monopoly Regulation
 Monopsony
 Antitrust Policy
 Competitive Strategy in Monopoly Markets
Chapter 12
 monopoly  patents
 price makers  regulatory lag
 monopoly  oligopsony
underproduction  monopsony
 deadweight loss from  monopsony power
monopoly problem  bilateral monopoly
 wealth transfer  antitrust laws
 market niche
 natural monopoly
Monopoly Market Characteristics
 Basic Features
 A single seller.
 Unique product.
 Blockaded entry and/or exit.
 Imperfect dissemination of information.
 Opportunity for long-run economic profits.
 Examples of Monopoly
 Classic examples include electricity utilities, gas and
sanitary services.
 OPEC and the NCAA are popular recent examples.
Profit Maximization in Monopoly
 Price/Output Decisions
 A monopoly firm is the market.
 Market and firm demand curve slope downward.
 Role of Marginal Analysis
 Set Mπ = MR - MC = 0 to maximize profits; MR=MC at
optimal output.
 Because monopoly demand curve is above the
marginal revenue curve, P = AR > MR and P > AC.
 Monopoly position allows above-normal profits, π > 0.
Social Costs of Monopoly
 Monopoly Underproduction
 Monopolists produce too little output.
 Monopolists charge prices that are too high, P > MC.
 Deadweight Loss from Monopoly
 Monopoly markets creates a loss in social welfare
due to the decline in mutually beneficial trade activity.
 There is also a wealth transfer problem associated
with monopoly; consumer surplus is transferred to
producer surplus.
Social Benefits of Monopoly
 Economies of Scale
 In natural monopoly, LRAC declines
continuously and one firm is most efficient.
 Some real-world monopolies are government-
created or government-maintained.
 Invention and Innovation
 Public policy sometimes confers explicit
monopoly rights to spur productivity, e.g.,
Monopoly Regulation
 Dilemma of Natural Monopoly
 Monopoly has the potential for efficiency.
 Unregulated monopoly can lead to economic
profits and underproduction.
 Utility Price and Profit Regulation
 Regulation is sometimes used to improve
monopoly market performance.
 Substituting bureaucratic decisions for market
interactions is risky and costly.
 Buyer Power
 Oligopsony describes a handful of buyers.
 Monopsony exists if there is only one buyer.
 Buyer power can be used to obtain less than
competitive market prices.
 Bilateral Monopoly Illustration
 Unrestrained monopoly gets higher than competitive
market prices.
 Unrestrained monopsony gets lower than competitive
market prices.
 Monopoly/monopsony confrontation can breed
Antitrust Policy
 Overview of Antitrust Law
 Market dominance is no offense.
 Unfairly gained competitive advantage is illegal.
 Sherman and Clayton Acts
 Sherman Act forbids restraints of trade and
 Clayton Act focuses on mergers, interlocking
directorates, price discrimination, and tying contracts.
 Antitrust Enforcement
 Department of Justice pursues criminal violations.
 FTC litigates civil violations.
Competitive Strategy in Monopoly
 Market Niches
 A market niche is a market segment that can be
successfully exploited with special capabilities.
 Unique goods and services have the potential to
create durable monopoly profits.
 Information Barriers to Competitive Strategy
 Published data often measure economic profits only
 Business practices protect trade secrets.