Marketing
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CH-7FINA251.pptChapter - 7
Market Structure
Monopoly
Characteristics of a Monopoly
1- A monopoly industry is an industry with only one seller (mono = 1; poly = seller).
2- A single seller has complete control, Monopolist is a price maker.
3-There are no close substitutes for the product.
4-There is no free entry and exit because of some restrictions.
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Reasons for Monopoly Forming
Monopolies exist for the following reasons:
Legistical,Technological and Natural Monopoly
Legal barriers (U.S. Postal Service)
Patents and copyrights (games, books, tv shows)
Licenses (doctors, taxi drivers)
Trade restrictions (prescription medication)
Exclusive ownership (DeBeers Diamonds Co.)
Economies of Scale
(Microsoft, Intel)
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Types of monopolies
We distinguish between these two types of monopolies:
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.
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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.
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CH 7 - Monopoly
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| Q | P | TR | MR | TC | MC | AC | TP |
| 0 | 16 | 0 | - | 12 | - | - | -12 |
| 1 | 14 | 14 | 14 | 14 | 2 | 14 | 0 |
| 2 | 12 | 24 | 10 | 18 | 4 | 9 | 6 |
| 3 | 10 | 30 | 6 | 24 | 6 | 8 | 6 |
| 4 | 8 | 32 | 2 | 32 | 8 | 8 | 0 |
| 5 | 6 | 30 | -2 | 42 | 10 | 8.4 | -12 |
| 6 | 4 | 24 | -6 | 52 | 12 | 9 | -20 |
By using the previous table answer these questions
How many units the firm must produce to earn max. profit (useTotals)? Why
How many units the firm must produce to earn max. profit (use Marginal)? Why
Monopoly firm can maximize its profit when produce quantity at MR = MC.
(Q = 3 , P = $10) *
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A Monopolist’s Demand and Marginal Revenue Curve
Revenue
Quantity
Demand=AR
MR
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The Profit Maximizing Quantity
Revenue
Quantity
Demand = AR
MR
MC
Qpm
MR=MC
Profit-maximizing quantity
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The Profit Maximizing Quantity
Revenue
Quantity
Demand = AR
MR
MC
Qpm
Ppm
Profit-
maximizing
price
10
The Profit Area
Revenue
Quantity
Demand = AR
MR
MC
$30
ATC
$14
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| Economic Profit | TR > TC ATR > ATC | P > ATC |
| No profit or loss Normal Profit ( Break-Even Point ) | TR = TC ATR = ATC | P = ATC |
| Loss but it can continue in production | TR > TVC | P > AVC |
| Loss. ( Shut-Down Point ) | TR = TVC | P = AVC |
| Loss .Close the firm and stop production | TR < TVC | P <AVC |
United States Anti-trust Legislation
Anti-trust = Anti-monopoly
Main anti-trust laws passed in the United States:
The Sherman Act of 1890
The Clayton Act of 1914
The Federal Trade Commission Act of 1914
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United States Anti-trust Legislation
1- The Sherman Act
outlaws all contracts, combinations and conspiracies that unreasonably restrain interstate and foreign trade.
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United States Anti-trust Legislation
2-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.
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United States Anti-trust Legislation
3- 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.
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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.
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