Chapter 12

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MANAGERIAL ECONOMICS

MANAGERIAL ECONOMICS

12

12

thth

Edition

_Edition

By

By

Mark Hirschey

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Monopoly and Monopsony

Monopoly and Monopsony

Chapter 12

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Chapter 12

Chapter 12

OVERVIEW

OVERVIEW



Monopoly Market Characteristics



Profit Maximization in Monopoly Markets



Social Costs of Monopoly



Social Benefits of Monopoly



Monopoly Regulation



Monopsony



Antitrust Policy

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Chapter 12

Chapter 12

KEY CONCEPTS

KEY CONCEPTS



monopoly



price makers



monopoly

underproduction



deadweight loss from

monopoly problem



wealth transfer

problem



natural monopoly



patents



regulatory lag



oligopsony



monopsony



monopsony power



bilateral monopoly



antitrust laws

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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.

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Profit Maximization in Monopoly

Markets



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.

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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

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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

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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

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Monopsony



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.

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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
“monopolizing.”

 Clayton Act focuses on mergers, interlocking

directorates, price discrimination, and tying contracts.



Antitrust Enforcement

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Competitive Strategy in Monopoly

Markets



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

imperfectly.

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