Chapter 8 The Economics of Monopoly Power: Who Does What to Whom? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

8-2 The Economics of Monopoly Power Monopoly Imperfect Competition Monopoly Power – extent of control over supply of product Concentration Ratio IndustryConcentration Ratio House Slipper Manufacturing96.8 Cigarettes95.3 Breweries90.8 Primary aluminum85.8 Cereal breakfast foods82.0 Aircraft engines76.9 Automobile manufacturing75.5 Soap and other detergents60.6 Snack foods56.2 Electronic computers49.5 Cement38.7 Petroleum refineries41.2 Synthetic rubber39.0 Cement38.7 Apparel manufacturing17.3

8-3 Outputs and Prices Quantity per unit of time Price D D P’ P2P2 P1P1 x2x2 x1x1 x’ If seller raises price to P 2, quantity demanded will fall to x 2

8-4 Prices and Output in a Competitive Market Quantity per unit of time Price PxPx PxPx D D S S MC MR d d X x Table

8-5 Marginal Costs and Supply in a Competitive Market Quantity per unit of time Quantity per unit of time (000) Price D D S S MC s MR d d MR 1 d1d1 d1d a b A B

Outputs, Revenues, Costs, and Profits for a Monopoly Firm OutputTotal Cost (TC) Marginal Cost (MC) Price (P x ) Total Revenue (TR) Marginal Revenue (MR) Profits

8-7 Competition versus Monopoly Quantity per unit of time (000) D D = MSB S = MSC MR S = MC

8-8 Entry Restrictions Private barriers  Ownership of key raw material  Threat of lower prices  Product differentiation  Network economies Government barriers  Regulatory commissions and entry-blocking rules  Occupational licensing laws  Import duties and import restrictions  Patents and copyrights  Exclusive franchises  Zoning ordinances and building codes

8-9 Nonprice Competition Advertising Periodic change in design and quality of product

8-10 Should We Fear Monopoly Power? Welfare Cost of Monopoly Entry Restrictions and Resource Allocation Nonprice Competition What is Bigness?  Too big to fail?

8-11 Average cost rises as more is produced The Peculiar Case of Natural Monopoly Quantity per unit of time Price $ Q0Q0 economies of scalediseconomies of scale Average cost minimized Average cost falls as more is produced

8-12 When Should Government Regulate Business? When should government regulate business?  Market failure  Consumers lack information  Poorly defined property rights  Benefits of regulation exceed the cost  Capture theory Deregulation movement

8-13 Regulation and Corporate Responsibility Corporations Corporate stock Advantages of corporate form – limited liability Disadvantages of corporate form – agency problem Use of stock options

8-14 Outputs, Revenues, Costs, and Profits for a Competitive Firm OutputTotal Cost (TC) Marginal Cost (MC) Price (P x ) Total Revenue (TR) Marginal Revenue (MR) Profits