1. © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 9 Monopoly and Antitrust Policy

2. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 2 of 32 Monopoly A firm that is the only seller of a good or service that does not have a close substitute. Is Any Firm Ever Really a Monopoly? Learning Objective 9.1

3. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 3 of 32 1 Government blocks the entry of more than one firm into a market. 2 One firm has control of a key resource necessary to produce a good. 3 There are important network externalities in supplying the good or service. 4 Economies of scale are so large that one firm has a natural monopoly. Where Do Monopolies Come From? Learning Objective 9.2 To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Barriers to entry may be high enough to keep out competing firms for four main reasons:

4. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 4 of 32 1 By granting a patent or copyright to an individual or firm, giving it the exclusive right to produce a product. 2 By granting a firm a public franchise, making it the exclusive legal provider of a good or service. Where Do Monopolies Come From? Learning Objective 9.2 Entry Blocked by Government Action In the United States, government blocks entry in two main ways:

5. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 5 of 32 Where Do Monopolies Come From? Learning Objective 9.2 Natural Monopoly Natural monopoly A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.

6. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 6 of 32 Learning Objective 9.2 FIGURE 9-1 Average Total Cost Curve for a Natural Monopoly Where Do Monopolies Come From? Natural Monopoly

7. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 7 of 32 Government Policy toward Monopoly Learning Objective 9.5 Antitrust Laws and Antitrust Enforcement Collusion An agreement among firms to charge the same price or otherwise not to compete. Antitrust laws Laws aimed at eliminating collusion and promoting competition among firms.

8. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 8 of 32 Government Policy toward Monopoly Learning Objective 9.5 Antitrust Laws and Antitrust Enforcement Table 9-1 Important U.S. Antitrust Laws LAWDATEPURPOSE Sherman Act1890Prohibited “restraint of trade,” including price fixing and collusion. Also outlawed monopolization. Clayton Act1914Prohibited firms from buying stock in competitors and from having directors serve on the boards of competing firms. Federal Trade Commission Act 1914Established the Federal Trade Commission (FTC) to help administer antitrust laws. Robinson-Patman Act1936Prohibited charging buyers different prices if the result would reduce competition. Cellar-Kefauver Act1950Toughened restrictions on mergers by prohibiting any mergers that would reduce competition.

9. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 9 of 32 Learning Objective 9.5 Horizontal merger A merger between firms in the same industry. Vertical merger A merger between firms at different stages of production of a good. Government Policy toward Monopoly Mergers: The Trade-off between Market Power and Efficiency

10. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 10 of 32 Learning Objective 9.5 1 Market definition 2 Measure of concentration 3 Merger standards Market Definition A market consists of all firms making products that consumers view as close substitutes. Government Policy toward Monopoly The Department of Justice and Federal Trade Commission Merger Guidelines The guidelines have three main parts:

11. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 11 of 32 Learning Objective 9.5 1 firm, with 100% market share (a monopoly): HHI = 100 2 = 10,000 Measure of Concentration 2 firms, each with a 50% market share: HHI = 50 2 + 50 2 = 5,000 4 firms, with market shares of 30%, 30%, 20%, and 20%: HHI = 30 2 + 30 2 + 20 2 + 20 2 = 2,600 10 firms, each with market shares of 10%: HHI = 10 (10 2 ) = 1,000 Government Policy toward Monopoly The Department of Justice and Federal Trade Commission Merger Guidelines

12. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 12 of 32 Learning Objective 9.5 Post-merger HHI below 1,000. These markets are not concentrated, so mergers in them are not challenged. Merger Standards Post-merger HHI between 1,000 and 1,800. These markets are moderately concentrated. Mergers that raise the HHI by less than 100 probably will not be challenged. Mergers that raise the HHI by more than 100 may be challenged. Post-merger HHI above 1,800. These markets are highly concentrated. Mergers that increase the HHI by less than 50 points will not be challenged. Mergers that increase the HHI by 50 to 100 points may be challenged. Mergers that increase the HHI by more than 100 points will be challenged. Government Policy toward Monopoly The Department of Justice and Federal Trade Commission Merger Guidelines

13. Chapter 9: Monopoly and Antitrust Policy © 2009 Prentice Hall Business Publishing Essentials of Economics Hubbard/O’Brien, 2e. 13 of 32 Antitrust laws Collusion Copyright Horizontal merger Market power Monopoly Natural monopoly Network externalities Patent Public franchise Vertical merger K e y T e r m s