Chapter 13 Antitrust & Regulation 6/21/2015. What is a Monopoly? A market structure consisting of one firm producing a good that has no close substitutes.

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Presentation transcript:

Chapter 13 Antitrust & Regulation 6/21/2015

What is a Monopoly? A market structure consisting of one firm producing a good that has no close substitutes and firm entry is impossible

What should a Monopoly charge to maximize profit? MR = MC Price determined at output level where

MC=ATC PCPC QCQC D MR Quantity Price 0 m n QMQM a b PMPM Monopolist’s Profit Deadweight Loss under Monopoly

Divergent views regarding how to deal with Monopolies?  1. Regulate  2. Nationalize  3. Leave alone  4. Concentrate  5. Split up

What is Regulation? Although ownership of the regulated firm remains in private hands, pricing and production decisions are monitored by government

What is a fair market price to impose on a Monopoly? The price that will enable it to make a Normal Profit Where does a Monopoly make a Normal Profit? P = ATC

D ATC AVC MC Q1Q1 P1P1 Q2Q2 P2P2 P3P3 Q3Q3

Can less than a Normal Profit be mandated? Yes! But only if the monopoly is subsidized

The City Bus Company

Profit Maximization Q $ MR ATC MC D P ATC 1111 Profit $2 60,000 Price $1