III.  Market Structure, Competitive Strategy, and Input Markets

A.  Market Power:  Monopoly

• Monopoly - one seller

• Monopsony - one buyer

1.  Revenue

.

.

.

.

.

.

2.  Profit maximization

.

.

.

.

.

.

.

.

.

3.  Pricing rule of thumb

.

.

.

.

.

.

4.  Measuring monopoly power

.

.

.

.

.

. 

5.  Sources of monopoly power

a.  Elasticity of market demand

.

.

.

.

.

.

.

.

.

.

b.  Number of firms

• Consider the case of less than complete monopoly power

.

.

. 

• Barriers to entry can limit number of firms

(1) Patents - protects technology and processes

(2) Copyrights - written material, music, software

(3) Licenses - required by a government to enter a market

(4) Economies of scale

.

.

.

.

.

.

.

.

.

.

c.  Interaction among firms

• Competitive vs. cooperative behavior

.

.

. 

6.  Social costs of monopoly

• Loss of surplus

.

.

.

.

.

.

.

.

.

.

• Rent seeking - spending money in unproductive efforts to acquire, maintain, or exercise monopoly power

.

7.  Dealing with monopoly power

a.  Price regulation

(1) Impact on profit maximization

.

.

.

.

.

.

.

.

.

.

(2)  Natural monopoly

• Strong economies of scale

.

.

.

.

.

.

.

.

.

.

(3) Regulation in practice

• Rate-of-return regulation - set price to let firm achieve a "fair" rate of return

.

b.  Antitrust laws

• Rules and regulations prohibiting actions that restrain competition

.

(1)  Restrictions on firms

• Prohibited:

(a)  Contracts, combinations, or conspiracies in restraint of trade

(b)  Parallel conduct - implicit collusion where one firm follows the actions of another

(c)  Monopoly or attempts to monopolize

(d)  Predatory pricing - pricing to drive competitors out of business

(e)  Mergers and acquisitions that reduce competition

(f)  Price discrimination to injure competition

. 

(2)  Enforcement

(a)  Antitrust Division of the Department of Justice

• Can respond to external complaint or internal studies

.

(b)  Administrative procedures of the Federal Trade Commission

.

(c)  Private proceedings

• Private individuals or organizations can sue for damages

.