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ECO 201
Instructor’s Notes
Instructor: Rasha Fattouh
Chapter 13 : Monopoly & Antitrust Policy

I. Introduction
• In this chapter we study markets that are controlled by a single firm
II. Concepts of Imperfect Competition and Market Power
Imperfectly Competitive Industry: single firms have some control over the price of their
output
Market Power: is the imperfectly competitive firm’s ability to raise price without losing all
demand for its product. The existence of close substitutes of products limits the market power
of a firm.
How do we define an industry in this case?

→ the ease in which consumers can find substitutes for a product. This is ease is what limits
monopolistic power.
Forms of Imperfect Competition and Market Boundaries
Define a pure Monopoly: an industry with a single firm that:

1. Produced a product in which there are no close substitutes
2. Significant barriers to entry prevent other firms from entering the industry to
compete for profit.
What are significant barriers to entry?

→ prevent other firms from entering the industry to compete for profit. How?
1. Government Franchise: firms that become monopolies by virtue of a government

directive
2. Patents: rights that grant exclusive use of a product
3. Economies of scale & other cost advantage: enjoyed by industries that have a large
capital requirements (competing with a large investment)
4. Ownership of a scarce factor of production: if a certain production requires a
particular input, and one firm owns the entire supply of that input, it will control the
industry.
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III. Price & Output Decisions in Pure Monopoly Markets
Assumptions:
• We assume that no other firms are allowed to enter (entry is blocked).
• No price discrimination
• Firms want to maximize profits and minimize costs
A. Demand in Monopoly Markets
• Remember in Chapter 8, when we learned about perfect competition, we learned that

the demand curve of the firm is determined by the equilibrium price of the market
• For a pure monopoly, the firm is the market
• With one firm in a monopoly market, there is no distinction between the firm & the
industry.
• The firm faces the entire demand market curve, and total supply is what the firm
decides to produce.
• For perfect competition, the demand curve was perfectly elastic. For a monopoly, the
demand is downward sloping
• For the monopoly to determine the price, it has to check what the consumers are
willing to pay for.
Marginal Revenue & Market Demand

➢ In order to sell more, the monopolist must lower its price on all units of output sold. MR will
be less than price
➢ Profit Maximization is also at MR=MC but unlike perfect competition MR  P
➢ For a monopolist MR < P
• A monopolist starts by charging the price as high as
possible. So, at point A, the quantity demanded is
zero.
• Monopolist will eventually lower the price to start and
selling more, which is why MR is less than the demand
and Price.
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ECO 201
This is how to analyze the graph:

• Profit Maximization is when MR=MC
• However, for the monopoly, check
were MR=MC, then draw a line to
intersect the demand curve. At point
A.
• After 5 units of output, MC>MR so the
monopolist will start to lose
• Total Revenue = PmAQM0
• Total Cost = CBQM0
• Profit = TR-TC= PMABC
Some monopolies suffer losses in the short run if the ATC > Demand in the long run, it should
go out of business.
IV. Social Costs of a Monopoly
A. Rent Seeking Behavior
• A monopolist might try to protect its positive economic profits by lobbying politicians
for legal protection for its monopoly position. This consumes resources and may lead
the government to become a tool of the rent seeker, causing the allocation of
resources to be made even less efficient because of the government intervention.
• Sometimes this leads to government failure
V. Price Discrimination
• A firm that successfully price discriminates will increase its profits by capturing even more
of the consumer surplus. The quantity of output is usually still inefficient and there is usually
still a deadweight loss.
• A firm that price discriminates perfectly will capture the entire consumer surplus. A
monopolist that manages to do this will actually produce the efficient quantity of output,
eliminating the deadweight loss.
• However, there is zero consumer surplus so we don’t usually think of this as a good outcome.
• Examples of Price Discrimination: airlines, movie theaters, hotels, telephone
companies, theme parks, medical care, and so on.
• The basic objective of price discrimination is to increase profits.
VI. Role of the Government
Governments have two main roles when it comes to markets, and they are somewhat
contradictory:
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ECO 201
(1) The encourage competition and limit market power through antitrust laws
(2) The limit competition by regulating industrings
Major Antitrust Legislation
A. Sherman Act of 1980 declared every contract or conspiracy to restrain trade among
states or nationals illegal
➢ This law intuitively seemed to declare the structure of monopoly illegal but it was
unclear what specific acts were considered “restraints of trade”.
B. The Clayton Act and the Federal Trade Commission, 1914

➢ It was passed by congress to strengthen the Sherman Act and clarify the rule of
reason.
➢ The act banned specific monopolistic behaviors: price discrimination, tying contracts
etc.

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ECO 201

Chapter 13 : Monopoly & Antitrust Policy

II. Concepts of Imperfect Competition and Market Power

How do we define an industry in this case?

Define a pure Monopoly: an industry with a single firm that:

What are significant barriers to entry?

1. Government Franchise: firms that become monopolies by virtue of a government

III. Price & Output Decisions in Pure Monopoly Markets

A. Demand in Monopoly Markets

• Remember in Chapter 8, when we learned about perfect competition, we learned that

Marginal Revenue & Market Demand

This is how to analyze the graph:

A. Rent Seeking Behavior

VI. Role of the Government

Major Antitrust Legislation

B. The Clayton Act and the Federal Trade Commission, 1914

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