141_Chapter_13_Lecture_Outline

141_Chapter_13_Lecture_Outline - 13 Monopoly and Antitrust...

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13 Monopoly and Antitrust Policy OUTLINE OF TEXT MATERIAL I Introduction This chapter begins to explore the implications of relaxing one of the assumptions made  in earlier chapters, that a large number of buyers and sellers interact in each market. The  focus is on the case of a single firm in an industry: a monopoly. II. Imperfect Competition and Market Power: Core Concepts A market or industry in which individual firms have some control over the price of their  output is  imperfectly competitive . All firms in such a market have  market power , the ability  to raise prices without losing all demand for their product. A firm must be able to limit  competition by erecting (or taking advantage of) barriers to entry. A. Defining Industry Boundaries 1. The existence and degree of closeness of substitutes limits a firm’s market  power. 2. A   pure monopoly   is an industry (1) with a single firm that produces a  product   for   which   there   are   no   close   substitutes   and   (2)   in   which  significant barriers to entry prevent other firms from entering the industry  to compete for profits. B. Barriers to Entry  are factors that prevent new firms from entering and competing  in imperfectly competitive industries. 1. Government Franchises: A monopoly by virtue of government directive.  Justified by large economies of scale, equity, or the government’s desire to  control a particular market. 2. Patents: A grant of exclusive use of the patented product or process to the  inventor. Meant to provide an incentive for invention and innovation. In  133
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134   Principles of Microeconomics most countries patent protection is granted for 20 years from the date the  patent is filed. 3. Economies of Scale and Other Cost Advantages 4. Ownership of a Scarce Factor of Production C. Price: The Fourth Decision Variable Firms with market power have a fourth decision variable because they can decide  what price to charge for their product. They also must decide the quantity of  output to produce and the technology to use. III. Price and Output Decisions in Pure Monopoly Markets We assume that entry is blocked, the firm seeks to maximize profits and the firm buys  inputs   from   perfectly   competitive   markets.   That   means   the   monopolist’s   costs   are  identical to those of a perfectly competitive firm. A.
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This note was uploaded on 06/15/2010 for the course EC 142DLB taught by Professor Graceonodipe during the Spring '10 term at Park.

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141_Chapter_13_Lecture_Outline - 13 Monopoly and Antitrust...

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