Microeconomic Theory

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Advanced seminar A
Chapter 5

Rbert F. Veszteg o
Waseda University

April 2012

Microeconomic Theory

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Complementary ideas, arguments and facts to

Real-World Micro

Chapter 5 Market structure and monopoly

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Market structure

discussion based on

Mankiw, N.G. (2008) Principles of Economics, 5th edition, South-Western College Pub.

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Market-structure typology
(perfectly) competitive market monopoly - monopsony
natural monopoly cartel (collusion)

oligopoly - duopoly
Cournot competition Bertrand competition Stackelberg competition

monopolistic competition

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Competitive market
The Competitive Firm s Supply Curve
The firm s LR supply curve is the portion of its MC curve above LRATC.
Costs MC LRATC

Q
FIRMS IN COMPETITIVE MARKETS
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Monopoly
Profit-Maximization
1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Q
Costs and Revenue MC

D MR Quantity

Profit-maximizing output
MONOPOLY
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Natural monopoly
Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms.
Example: 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes.
MONOPOLY

Cost

Electricity
ATC slopes downward due to huge FC and small MC ATC 500 1000 Q
4

$80 $50

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Cartel
T-Mobile & Verizon in the Prisoners Dilemma
Each firm s dominant strategy: renege on agreement, produce Q = 40.
T-Mobile Q = 30
T-Mobile s profit = $900 Verizon s profit = $900 T-Mobile s profit = $750 Verizon s profit = $1000

Q = 40
T-Mobile s profit = $1000 Verizon s profit = $750 T-Mobile s profit = $800 Verizon s profit = $800
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Q = 30 Verizon Q = 40

OLIGOPOLY

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Monopolistic competition
A Monopolistic Competitor in the Long Run
Entry and exit occurs until P = ATC and profit = zero.

Price

MC ATC

Notice that the P = ATC firm charges a markup of price markup over marginal cost and does not MC produce at minimum ATC.
MONOPOLISTIC COMPETITION

D MR Q Quantity
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Antitrust legislation in the EU

http://ec.europa.eu/competition/antitrust/overview en.html

Competition is a basic mechanism of the market economy and encourages companies to provide consumers products that consumers want. It encourages innovation, and pushes down prices. In order to be eective, competition needs suppliers who are independent of each other, each subject to the competitive pressure exerted by the others.

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Antitrust legislation in the EU

The antitrust area covers two prohibition rules set out in the Treaty on the Functioning of the European Union. First, agreements between two or more rms which restrict competition are prohibited by Article 101 of the Treaty, subject to some limited exceptions. [...] Second, rms in a dominant position may not abuse that position (Article 102 of the Treaty).

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Antitrust legislation in the EU

http://ec.europa.eu/competition/consumers/abuse en.html

Abuse of a dominant position A company can restrict competition if it is in a position of strength on a given market. A dominant position is not in itself anti-competitive, but if the company exploits this position to eliminate competition, it is considered to have abused it.

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Antitrust legislation in the EU

Examples include: charging unreasonably high prices depriving smaller competitors of customers by selling at articially low prices they cant compete with obstructing competitors in the market (or in another related market) by forcing consumers to buy a product which is articially related to a more popular, in-demand product refusing to deal with certain customers or oering special discounts to customers who buy all or most of their supplies from the dominant company making the sale of one product conditional on the sale of another product.

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Antitrust legislation in the US

http://www.justice.gov/atr/public/reports/236681 chapter1.htm

Section 2 of the Sherman Act makes it unlawful for any person to monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations ...

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Antitrust legislation in the US

At its core, section 2 makes it illegal to acquire or maintain monopoly power through improper means. The long-standing requirement for monopolization is both
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the possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

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A brief comparison

http://www.iie.com/publications/chapters preview/56/10ie1664.pdf

[A] rm that legally acquires a monopoly position can sell at any price it chooses under US law and can intentionally limit production in order to drive up the price. [In the EU, a] dominant rm has broad duties to deal and may oend the law by not serving all demand.

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Mancur Olson
The Logic of Collective Action: Public Goods and the Theory of Groups (1965) Only a separate and selective incentive will stimulate a rational individual in a latent group to act in a group-oriented way. In general, social pressure and social incentives operate only in groups of smaller size, in the groups so small that the members can have face-to-face contact with one another.