1. 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

2. 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

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

4. 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

5. 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 d1d1 3377 a b A B 14 10 14

6. Outputs, Revenues, Costs, and Profits for a Monopoly Firm 1234567 OutputTotal Cost (TC) Marginal Cost (MC) Price (P x ) Total Revenue (TR) Marginal Revenue (MR) Profits 002000 188 12 217919381821 3271018541627 4381117681430 5501216801230 6631315901027 77714 98821 8921513104612 9108161210840 1012517111102-15 8-6

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

8. 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

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

10. 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?

11. 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

12. 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

13. 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

14. 8-14 Outputs, Revenues, Costs, and Profits for a Competitive Firm 1234567 OutputTotal Cost (TC) Marginal Cost (MC) Price (P x ) Total Revenue (TR) Marginal Revenue (MR) Profits 001400 188 6 217914281411 3271014421415 4381114561418 5501214701420 6631314841421 77714 981421 89215141121420 910816141261418 1012517141401415