Chapter 14 Study Guide

Chapter 14 Study Guide - Chapter 14 Monopoly and Antitrust...

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Unformatted text preview: Chapter 14 Monopoly and Antitrust Policy Chapter Summary You saw in Chapter 11 that perfectly competitive markets are rare, but they show how firms act when there are many firms supplying the same product. Monopoly is the other extreme – where a firm is the only supplier of a particular product. A monopoly is a firm that is the only seller of a good or service that does not have a close substitute. For a monopoly to exist, barriers to entering the market must be so high that no other firms can enter. These entry barriers result from: 1. government blocking the entry of more than one firm into a market, 2. control over an input necessary to produce a product. 3. important network externalities. 4. economies of scale so large that one firm has a natural monopoly. A monopoly firm maximizes profit by producing the quantity of output that makes marginal revenue equal to marginal cost. A monopoly firm’s demand curve is the same as the market demand curve for the product it sells. If the monopolist’s price exceeds its average total cost at the output where marginal revenue equals marginal cost, it will earn an economic profit. Because of high entry barriers, new firms will not be able to enter the market. If other things remain the same, the firm will be able to continue to earn economic profits, even in the long run. Generally, a monopoly will produce a smaller quantity and charge a higher price than would a perfectly competitive industry producing the same good. Because a monopolist’s profit-maximizing price exceeds marginal cost, a monopoly generates a loss in economic efficiency relative to a perfectly competitive market. The first important law regulating monopolies in the United States was the Sherman Act of 1890, which targeted firms that combined to form trusts. Other antitrust laws were passed in the twentieth century to regulate behavior not addressed in the Sherman Act. The Department of Justice and the Federal Trade Commission have developed guidelines to evaluate proposed mergers between firms. The guidelines have three main parts: market definition, measure of concentration, and merger standards. Firms that propose to merge must document the efficiencies that would result from their merger. It is typical for state or local regulatory commissions to set prices for natural monopolies. Most regulators allow owners of monopoly firms to earn a normal profit on their investment. Learning Objectives When you finish this chapter, you should be able to: 1. Define monopoly. The economic model of monopoly provides a benchmark for a firm that faces no competition from other firms supplying its product. The model is also useful for analyzing situations where firms agree to not compete and act as if they were a monopoly. A single seller in a small, local market may also find it has considerable monopoly power. CHAPTER 14 | Monopoly and Antitrust Policy 388 2. Explain the four main reasons monopolies arise. For a monopoly to exist, barriers to entering the...
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Chapter 14 Study Guide - Chapter 14 Monopoly and Antitrust...

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