Unit 7 - Monopoly u Characteristics of a Monopoly  A monopoly industry is an industry with only one seller (mono = 1; poly = seller).  Most monopolies have significant economies of scale. Microeconomics

Unit 7 - Monopoly u Reasons for Monopoly Forming Monopolies exist for the following reasons: 1.Legal barriers (U.S. Postal Service) 2.Patents and copyrights (games, books, tv shows) 3.Licenses (doctors, taxi drivers) 4.Trade restrictions (prescription medication) 5.Exclusive ownership (DeBeers Diamonds Co.) 6.Economies of Scale (Microsoft, Intel) Microeconomics

Unit 7 - Monopoly u Types of monopolies We distinguish between these two types of monopolies: 1.Government-granted. The government grants the monopoly. Examples: U.S. Postal Service, gas and electric companies. 2.Free market. The monopoly is earned through innovations, efficiency, or resource control. Examples: Microsoft, Intel, DeBeers. Microeconomics

Unit 7 - Monopoly u Types of monopolies In the case of government-granted monopolies, there is little incentive for the monopoly to earn profits. Economic efficiency is unlikely. In the case of free market monopolies, there is a threat of competition. Most firms keep their monopoly status by operating efficiently, offering quality products and low prices. Microeconomics

Unit 7 - Monopoly u A Monopolist’s Demand Curve Microeconomics

Unit 7 - Monopoly u A Monopolist’s Total, Marginal, and Average Revenue Microeconomics

Unit 7 - Monopoly u A Monopolist’s Total, Marginal, and Average Revenue Microeconomics

Unit 7 - Monopoly u A Monopolist’s Demand and Marginal Revenue Curve Microeconomics Revenue Quantity Demand=AR MR

Unit 7 - Monopoly u The Profit Maximizing Quantity Microeconomics Revenue Quantity Demand = AR MR MC Qpm MR=MC Profit-maximizing quantity

Unit 7 - Monopoly u The Profit Maximizing Price Microeconomics Revenue Quantity Demand = AR MR MC Qpm Ppm Profit- maximizing price

Unit 7 - Monopoly u The Profit Area Microeconomics Revenue Quantity Demand = AR MR MC $30 ATC $27 2,000

Unit 7 - Monopoly u United States Anti-trust Legislation Anti-trust = Anti-monopoly Main anti-trust laws passed in the United States: 1.The Sherman Act of The Clayton Act of The Federal Trade Commission Act of 1914 Microeconomics

Unit 7 - Monopoly u United States Anti-trust Legislation The Sherman Act outlaws all contracts, combinations and conspiracies that unreasonably restrain interstate and foreign trade. Microeconomics

Unit 7 - Monopoly u United States Anti-trust Legislation The Clayton Act prohibits:  Price discrimination, if it leads to monopoly forming.  Mergers and acquisitions, which lead to monopoly forming.  A person from being a director of two or more competing corporations.  Exclusives dealing arrangements, if these arrangements lead to monopoly forming. Microeconomics

Unit 7 - Monopoly u United States Anti-trust Legislation The Federal Trade Commission Act established the Federal Trade Commission. Along with the anti-trust Division of the Department of Justice, enforces anti-trust laws. Microeconomics

Unit 7 - Monopoly u United States Anti-trust Legislation Do we need anti-trust laws? Alan Greenspan and Milton Friedman believe that they do more harm than good. If a company achieves its monopoly status through efficiency and innovation, then its services, low cost, and low prices can be beneficial for society and our economy. Microeconomics