1. McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Managers’ Incentives and the Need for Monitoring
Managers have an incentive to keep costs down, but their salaries are included in costs
This creates a monitoring problem which is the need to oversee employees to ensure that their actions are in the best interest of the firm
Employees’ incentives differ from the owner’s incentives
To address this problem, firms sometimes give managers incentive-compatible contracts in which the incentives of each of the two parties to the contract are made to correspond as closely as possible
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3. What Do Real-World Firms Maximize?
Firms have complicated goals that reflect the organizational structure and incentives built into the system
Although profit is one goal of a firm, often firms focus on other intermediate goals such as cost and sales
Some firms do not push for cost efficiency and become lazy monopolists
Lazy monopolists are firms that do not push for efficiency, but merely enjoy the position they are already in
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4. The Lazy Monopolist and X-Inefficiency
Lazy monopolists are not profit maximizers
They perform as efficiently as is consistent with keeping their jobs
The result is called X–inefficiency where firms operate far less efficiently than they technically could
Such firms have monopoly positions, but they don’t make large monopoly profits which can result in earning normal profits or even a loss
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5. How Competition Limits the Lazy Monopolist
New firms or international competition can push lazy monopolies to be more competitive
Corporate takeovers, or the threat of one, can improve efficiency
A corporate takeover is when another firm or group of individuals issues a tender offer (buy the stock) to gain control and install its own managers
Nonprofit organizations may display lazy monopolist tendencies
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6. How Monopolistic Forces Affect Perfect Competition
Laws, social values, and customs in the United States do not allow perfect competition to work because our government emphasizes other social goals besides efficiency
The Robinson-Patman Act and several state laws prevent firms from charging a price that is too low
The U.S. has laws, regulations, and programs that prevent agricultural markets from working competitively
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7. Movement Away from Competitive Markets
If suppliers of O-L can keep suppliers of L-M out of the market, price increases to PL P S
Profit increases by A PL
The suppliers kept out of the market lose C in producer surplus A B PM C
Consumers lose A+B in consumer surplus D Q O L M
Deadweight loss is B+C
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8. How Competition Forces Affect Monopoly
Competitive forces work to break down monopoly by using political or economic forces
Lobbying to change the law protecting monopoly
Developing a similar product without violating a patent
Reverse engineering is the process of a firm buying other firms products, disassembling them, studying them, and then copying them within the limits of the law
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9. How Firms Protect Their Monopolies
Monopolies spend money to maintain their monopoly by:
Advertising
Lobbying
Producing goods that are difficult to copy
Not taking advantage of their monopoly position and charging a lower price
Firms will buy monopoly power until the marginal cost of maintaining the monopoly equals the marginal benefit
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10. Establishing Market Position
It is argued that modern competition is a winner–take–all competition
In winner–take–all markets, the initial competition is on establishing market position
The winner who achieves a monopoly can charge significantly higher prices without facing any competition
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11. Technology, Efficiency, and Market Structure
Technological development is the discovery of new or improved products or methods of production
Because the global market is significantly larger than a domestic one, globalization provides an incentive to develop new technology
Market structures that best promote technological change are dynamically efficient
Dynamic efficiency refers to a market’s ability to promote cost-reducing or product-enhancing technological change
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12. Market Structure and Technology
Perfect competition
There is no incentive to develop new technologies because they earn no profits to fund research
Even if they did innovate, competitors would gain from the new technology without having to pay for it
Monopolistic competition
Because of market power, monopolistic competition is more conducive to technological change
Due to ease of entry, they lack long-run profits, so their ability to recoup their investment is limited
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13. Market Structure and Technology
Monopoly
Monopolists have profits but little incentive to innovate since they are protected by barriers to entry
Oligopoly
May be the market structure that is most conducive to technological change
If competitors are innovating, it will force them to do so as well
They receive economic profit, oligopolists have the money to carry out research and development
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14. Network Externalities, Standards, and Technological Lock–In
Network externalities occur when greater use of a product increases the benefit of that product to everyone
Network externalities lead to market standards and affect market structure
Standards are created when a firm’s standard is accepted and dominates the market
First-mover advantage helps explain the high stock prices of start-up technology companies
Technological lock-in is when prior use of a technology makes the adoption of subsequent technology difficult
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