Chapter 10

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
P Market P Individual Firm

D S
LMC LRAC
P0 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:
 P=6-Q
Chapter 10 Slide 8
Total, Marginal, and Average Revenue
Total Marginal Average
Price Quantity Revenue Revenue Revenue
P Q R MR AR
$6 0 $0 --- ---
5 1 5 $5 $5
4 2 8 3 4
3 3 9 1 3
2 4 8 -1 2
1 5 5 -3 1
Chapter 10 Slide 9
Average and Marginal Revenue
$ per
7
unit of
output
6
4 Average Revenue (Demand)
2
Marginal
1 Revenue
0 1 2 3 4 5 6 7 Output
Chapter 10 Slide 10
Monopoly
 Observations
1) To increase sales the price must fall
2) MR < P
3) Compared to perfect competition

 No change in price to change sales
 MR = P
Chapter 10 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
Lost
MR profit
Q1 Q* Q2 Quantity
Chapter 10 Slide 14
Monopoly
 An Example
2
Cost  C (Q)  50  Q
C
MC   2Q
Q
Chapter 10 Slide 15
Monopoly
 An Example
Demand  P (Q )  40  Q
2
R (Q)  P (Q )Q  40Q  Q
R
MR   40  2Q
Q
Chapter 10 Slide 16
Monopoly
 An Example
MR  MC or 40  2Q  2Q
Q  10
When Q  10, P  30
Chapter 10 Slide 17
Monopoly
 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' R
400
300
c’
200 t
Profits
150
100
50
c
0 5 10 15 20 Quantity
Chapter 10 Slide 19
 Observations
 Slope of rr’ = slope cc’ $ C
and they are parallel at t'
10 units 400 R
 Profits are maximized at

10 units 300
 P = $30, Q = 10, c
TR = P x Q = $300 200 t
 AC = $15, Q = 10, 150
TC = AC x Q = 150 Profits
100
 Profit = TR - TC 50 c
 $150 = $300 - $150 0 5 10 15 20
Quantity
Chapter 10 Slide 20
$/Q
40 MC
30
Profit
AC
20
AR
15
10
MR
0 5 10 15 20
Chapter 10 Quantity Slide 21

 Observations $/Q
 AC = $15, Q = 10, 40 MC
TC = AC x Q = 150
 Profit = TR = TC = $300 30
- $150 = $150 or
Profit AC
 Profit = (P - AC) x Q = 20
($30 - $15)(10) = $150 AR
15
10 MR
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 

3. E d   P  Q 
 
 Q  P 
Chapter 10 Slide 24
 Q  P  1
4.    
 P  Q  E
d
 1 
5. MR  P P 
 Ed 
Chapter 10 Slide 25
6.  is maximized @ MR  MC
 1  1
P  P 
 ED  ED
MC
P
1 1 ED 
Chapter 10 Slide 26
1
7.  = the markup over MC as a
Ed percentage of price (P-MC)/P
8. The markup should equal the

inverse of the elasticity of demand.
Chapter 10 Slide 27
MC
9. P 

1  1 
E 
 d 
Assume
Ed  4 MC  9
9 9
P   $12

1 1
4
 .75
Chapter 10 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
 1995
 Price of Prilosec = $3.50/daily dose
 Price of Tagamet and Zantac =
$1.50 - $2.25/daily dose
 MC of Prolosec = 30 - 40 cents/daily dose
Chapter 10 Slide 31
Astra-Merck Prices Prilosec
MC .35
P  
1  1 E D  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 Quantity
Chapter 10 Slide 34
Shift in Demand Leads to
Change in Output but Same Price
$/Q
MC
P1 = P 2
D2
MR2
D1
MR1
Q1 Q2 Quantity
Chapter 10 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
t D = AR
MC
MR
Q1 Q0 Quantity
Chapter 10 Slide 39
 Question
 Suppose: Ed = -2
 How much would the price change?
Chapter 10 Slide 40
 Answer
MC
P
1   1 
 Ed 
If Ed  2  P  2 MC
If MC increases to MC  t
P  2( MC  t )  2 MC  2t
Price increases by twice the tax.
 What would happen to profits?
Chapter 10 Slide 41
Monopoly
 The Multiplant Firm

 For many firms, production takes place in
two or more different plants whose
operating cost can differ.
Chapter 10 Slide 42
Monopoly
 The Multiplant Firm

 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.
Chapter 10 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  MC2
MR  MC1  MC2
Chapter 10 Slide 47
Production with Two Plants
$/Q
MC1 MC2
MCT
P*
MR* D = AR
MR
Q1 Q2 Q3 Quantity
Chapter 10 Slide 48
Production with Two Plants
 Observations:
1) MCT = MC1 + MC2
$/Q MC1 MC2
2) Profit maximizing
MCT
output:
 MCT = MR at QT and P *
 MR = MR* P*
 MR* = MC1 at Q1, MC* =
MC2 at Q2
MR* D = AR
 MC1 + MC2 = MCT, Q1 +
Q2 = QT,
and MR = MC1 + MC2 MR
Q1 Q2 Q3
Quantity
Chapter 10 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:
 Four firms with equal share (5,000) of a
market for 20,000 toothbrushes at a price
of $1.50.
Chapter 10 Slide 51
The Demand for Toothbrushes
$/Q $/Q
2.00 At a market price 2.00 The demand curve for Firm A
of $1.50, elasticity of depends on how much
demand is -1.5. 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
Firm A sees a much more
$/Q $/Q elastic demand curve due to
2.00 At a market price 2.00 competition--Ed = -.6. Still
of $1.50, elasticity of Firm A has some monopoly
demand is -1.5. power and charges a price
which exceeds MC.
1.60 MCA
1.50 1.50
1.40
Market DA
Demand
1.00 1.00 MRA
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
 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
Chapter 10 Slide 55
Monopoly Power
 Monopoly power does not guarantee

profits.
 Profit depends on average cost relative
to price.
 Question:
 Can you identify any difficulties in using the
Lerner Index (L) for public policy?
Chapter 10 Slide 56
Monopoly Power
 The Rule of Thumb for Pricing

MC
P
1 1 Ed 
 Pricing for any firm with monopoly power
 If Ed is large, markup is small
 If Ed is small, markup is large
Chapter 10 Slide 57
Elasticity of Demand and Price Markup
$/Q The more elastic is $/Q

demand, the less the
markup.
MC P* 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:
 Convenience Stores
1. Higher prices than supermarke ts
2. Convenience differentiates 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:
Convenience Stores
 Convenience stores have more

monopoly power.
 Question:
 Do convenience stores have higher profits
than supermarkets?
Chapter 10 Slide 61
Markup Pricing:
Designer Jeans
 Designer jeans
Ed = -3 to -4
 Price 33 - 50% > MC
 MC = $12 - $18/pair
 Wholesale price = $18 - $27
Chapter 10 Slide 62
The Pricing of
Prerecorded Videocassettes
1985 1999
Title Retail Price($) Title Retail Price($)

Purple Rain $29.98 Austin Powers $10.49
Raiders of the Lost Ark 24.95 A Bug’s Life 17.99
Jane Fonda Workout 59.95 There’s Something
about Mary 13.99
The Empire Strikes Back 79.98 Tae-Bo Workout 24.47
An Officer and a Gentleman 24.95 Lethal Weapon 4 16.99
Star Trek: The Motion Picture 24.95 Men in Black 12.99
Star Wars 39.98 Armageddon 15.86
The Pricing of
Prerecorded Videocassettes
 What Do You Think?

 Shouldproducers 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
Because of the higher
$/Q price, consumers lose
A+B and producer
Lost Consumer Surplus
gains A-C.
MC
Deadweight
Loss
Pm
A
B
PC C
AR
MR
Qm QC Quantity
Chapter 10 Slide 68
 Rent Seeking
 Firms may spend to gain monopoly power
 Lobbying
 Advertising
 Building excess capacity
Chapter 10 Slide 69
 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
 Example
 1996 Archer Daniels Midland (ADM)
successfully lobbied for regulations
requiring ethanol be produced from corn
 Question
 Why only corn?
Chapter 10 Slide 71
 Price Regulation
 Recall that in competitive markets, price
regulation created a deadweight loss.
 Question:
 What about a monopoly?
Chapter 10 Slide 72
Price Regulation
Marginal revenue curve
when price is regulated
$/Q to be no higher that P1.
MR
Pm MC
P1
P2 = P C
AC
P3
P4
AR
Forprice
output levels above Q1 ,
If Any
price is below
lowered P results
to PC output
If left alone, a monopolist
4
the
Ifthe
price original average
isincurring
lowered to P3and
inproduces
increases firmto Q
its and
maximumacharges
loss. Qoutput
Pm.
C and
marginal
decreases revenue
m curves apply.
there is noand a shortage
deadweight exists.
loss.
Qm Q1 Q3 Qc Q’3 Quantity
Chapter 10 Slide 73
 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
Unregulated, the monopolist
would produce Qm and
$/Q
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 Qr QC Quantity
Chapter 10 Slide 76
 Regulation in Practice
 It is very difficult to estimate the firm's cost
and demand functions because they
change with evolving market conditions
Chapter 10 Slide 77
 An alternative pricing technique---rate-of-return
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
 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
 Who is benefiting in the 1990s?
Chapter 10 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 MC
ME = AE AR = MR
P* P*
MR = MC
ME = MV at Q* P* = MR
ME = P* P* = MC
P* = MV D = MV
Quantity Quantity
Q* Q*
Monopsonist Buyer
The market supply curve is the monopsonist’s
$/Q average expenditure curve
ME
Monopsony
•ME > P & above S
S = AE
PC
Competitive P*m
•P = PC
•Q = Q+C MV
Q*m QC Quantity
Chapter 10 Slide 83
Monopoly and Monopsony
$/Q Monopoly
Note: MR = MC;
AR > MC; P > MC
MC
P*
PC
AR
MR
Q* QC Quantity
Chapter 10 Slide 84
$/Q
ME Monopsony
Note: ME = MV;
ME > AE; MV > P
S = AE
PC
P*
MV
Q* QC Quantity
Chapter 10 Slide 85
 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
 The less elastic the market supply, the
greater the monopsony power.
Chapter 10 Slide 88
Monopsony Power

2) Number of buyers
 The fewer the number of buyers, the less
elastic the supply and the greater the
monopsony power.
Chapter 10 Slide 89
Monopsony Power

3) Interaction Among Buyers
 The less the buyers compete, the greater
the monopsony power.
Chapter 10 Slide 90
Monopsony Power:
Elastic versus Inelastic Supply
ME
$/Q $/Q MV - P*
MV - P* S = AE
ME
S = AE
P*
P*
MV MV
Q* Quantity Q* Quantity
Deadweight Loss from
Monopsony Power
 Determining the
deadweight loss in
monopsony $/Q
ME
 Change in seller’s
surplus = -A-C Deadweight Loss
 Change in buyer’s S = AE
surplus = A - B B
PC A C
 Change in welfare = P*
-A - C + A - B = -C - B
MV
 Inefficiency occurs
because less is purchased
Q* QC Quantity
Chapter 10 Slide 92
Monopsony Power
The Social Costs of Monopsony Power
 Bilateral Monopoly
 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.
Chapter 10 Slide 93
Monopsony Power
The Social Costs of Monopsony Power
 Question
 In this case, what is likely to happen to
price?
Chapter 10 Slide 94
Limiting Market Power:
The Antitrust Laws
 Antitrust Laws:
 Promote a competitive economy
 Rules and regulations designed to promote
a competitive economy by:
 Prohibiting actions that restrain or are
likely to restrain competition
 Restricting the forms of market
structures that are allowable
Chapter 10 Slide 95
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
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
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
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
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

The Antitrust Laws
 Clayton Act (1914)

3) Prohibits mergers and acquisitions
if they “substantially lessen
competition” or “tend to create
a monopoly”

The Antitrust Laws
 Robinson-Patman Act (1936)

 Prohibits price discrimination if it is likely to
injure the competition

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

The Antitrust Laws
 Antitrust laws are enforced three ways:

1) Antitrust Division of the Department
of Justice
 A part of the executive branch--the
administration can influence enforcement
 Fines levied on businesses; fines and
imprisonment levied on individuals

The Antitrust Laws

2) Federal Trade Commission
 Enforces through voluntary
understanding or formal commission
order

The Antitrust Laws

3) Private Proceedings
 Lawsuits for damages
 Plaintiff can receive treble damages

The Antitrust Laws
 Two Examples
 American Airlines -- Price fixing
 Microsoft
 Monopoly power
 Predatory actions
 Collusion

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.

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.

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.

End of Chapter 10
Market Power:
Monopoly and
Monopsony

Chapter 10

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Chapter 10

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Chapter 10

 Review of Perfect Competition

P Market P Individual Firm

1) One seller - many buyers

2) One product (no good substitutes)

 The monopolist is the supply-side of the

 Finding Marginal Revenue

4 Average Revenue (Demand)

1) To increase sales the price must fall

3) Compared to perfect competition

 Monopolist’s Output Decision

1) Profits maximized at the output

2) Cost functions are the same

The Monopolist’s Output Decision

 At output levels below MR = MC the

 Profits are maximized at

Chapter 10 Quantity Slide 21

 A Rule of Thumb for Pricing

8. The markup should equal the

 Monopoly pricing compared to perfect

 Monopoly pricing compared to perfect

 The Effect of a Tax

 The Multiplant Firm

 The Multiplant Firm

Q1 & C1  Output & Cost for Plant 1

  PQT  C1 (Q1 )  C2 (Q2 )

10,000 20,000 30,000 Quantity 3,000 5,000 7,000 QA

10,000 20,000 30,000 Quantity 3,000 5,000 7,000 QA

 Measuring Monopoly Power

 Lerner’s Index of Monopoly Power

 Monopoly power does not guarantee

 The Rule of Thumb for Pricing

$/Q The more elastic is $/Q

 Convenience stores have more

Title Retail Price($) Title Retail Price($)

 What Do You Think?

 Why do some firm’s have considerable

 The firm’s elasticity of demand is

 Monopoly power results in higher prices

 The incentive to engage in monopoly

Natural monopolies occur

If the price were regulate to be PC,

Pm Setting the price at Pr

 P = price, AVC = average variable cost

 A monopsony is a market in which there is

$/Q Buyer $/Q Seller MC

 A few buyers can influence price (e.g.

 The degree of monopsony power

 The degree of monopsony power

 The degree of monopsony power

 Sherman Act (1890)

Examples of Illegal Combinations

Examples of Illegal Combinations

 Sherman Act (1890)

 Clayton Act (1914)

Chapter 10 Slide 100

 Clayton Act (1914)

Chapter 10 Slide 101

 Robinson-Patman Act (1936)

Chapter 10 Slide 102

 Federal Trade Commission Act (1914,

Chapter 10 Slide 103

 Antitrust laws are enforced three ways: