2. Monopoly Defined A monopoly is the ONLY firm in an industry. – No one produces the output nor sells the monopolist’s product. – There are local monopolies. Examples: local hardware store, dry cleaners, drugstore. – There are national/regional monopolies. Some examples are diamonds dealers, gas and electric companies, and local phone companies. A monopoly produces ALL the output in an industry. There are no close substitutes available for the product or service.

3. The Monopolist Making a Profit Here is a graph of the previous table: The monopolist earns a profit if for some range of output ATC lies below the D curve.

4. The Monopolist in the Short Run and the Long Run There is no distinction between the short run and the long run for the monopolist. – If there is a demand for their product or service, they make a profit (economic profits). – If there is not enough demand for their product for them to make a profit, they go out of business.

5. Barriers to Entry Monopolies are created and/or maintained through barriers to entry. How? 1.Control over an essential resource. – Examples: DeBeers’ land (mines); NFL’s skilled labor/talent. 2.Economies of scale 3.Legal barriers – Examples: licensing, franchises (including government franchises), and patents. – Is there BOTH Cola-Cola and Pepsi on your campus? 4.Required scale for innovation – Large firms tend to buy ideas and sell them! 5.Economies of being established

6. The Political Background The late 19 th century was the era of the “trust”. Trusts were cartels that set prices and allocated sales among their member firms. – The most blatant were in oil and sugar. – Others were in meat packing, cottonseed and linseed oil, lead, leather, whiskey, tobacco, electrical tools, coal, steel, and the railroads. Typical attitudes of the trust – The great financier J. P. Morgan proclaimed, “I owe the public nothing.” – Railroad tycoon Billy Vanderbilt said, “The public be dammed, I am working for my stockholders.”

7. The Sherman Antitrust Act (1890) Congress left the language of the law rather vague. Finally, after years of preparation by the [Teddy] Roosevelt and Taft administrations, suits were brought against Standard Oil and American Tobacco. – These companies were broken up by the court, not because they were big but because they were bad.

8. The Rule of Reason The Supreme Court’s decision breaking up Standard Oil and the American Tobacco Company was based on what they called its “rule of reason.” – Bigness itself was not an offense as long as that bigness was not used against rival firms. – This was in effect saying that the wolf not only had to be big and bad, but he actually had to blow the house down before he broke the law. – So mere size is no offense.

9. The Clayton Antitrust Act (1914) Prohibited 5 business practices that lessened competition or tended to create a monopoly when their effect was to “substantially lessen competition or tend to create a monopoly”: 1.Price discrimination 2.Interlocking stockholding 3.Interlocking directorates 4.Tying contracts 5.Exclusive dealings Also expressly excused labor unions from prosecution under the Sherman Act.

10. The Federal Trade Commission Act (1914) The Federal Trade Commission (FTC) was set up as a watchdog agency against the anticompetitive practices outlawed by the Sherman and Clayton acts. – The courts stripped most of its powers by the 1920s. – In 1938, the Wheeler-Lea Amendment gave the Federal Trade Commission what has become its most important job: preventing false and deceptive advertising. – In recent years, the FTC has been playing a more active role in approving or disapproving mergers before they are ever fully carried out. Examples: Staples and Office Depot; Barnes & Noble and Ingram Book Group

11. The 60 Percent Rule What has apparently evolved from past antitrust decisions is what might be called the “60 percent rule.” – “Should a firm have a share of at least 60 percent of the relevant market and should that firm have behaved badly toward its competitors, it would then be subject to prosecution.” – Whether a firm would be prosecuted would depend on the political and economic outlook of the current administration and the outlook of the Supreme Court justices.